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Corporate governance and bankruptcy are about ensuring that market signals are channeled into corporate decisions, and corporations do not abscond with resources entrusted them by investors. The purpose of this paper is to discuss how market and government failures influence the design of institutions supporting corporate finance in emerging market economies. Weaknesses in these institutions are an important part of the explanation for why more capital is not flowing from the capital-rich to the capital-poor economies. Even in countries that now enjoy large inflows of direct investment may find weak corporate governance and poorly functioning bankruptcy procedures to be critical if these flows were to corporate governance and bankruptcy laws are generally believed to be critical to investment and growth, they are particularly important in emerging market economies where corporations often are hugely influential in the economy-at-large and in politics. We propose a general framework for thinking about the challenges of designing these institutions in emerging market economies and draw some policy implications. In particular, we emphasize the importance of enforcement and the impact of weak enforcement on corporate governance and bankruptcy design.

Corporate governance and bankruptcy are about ensuring that market signals are channeled into corporate decisions, and corporations do not abscond with resources entrusted them by investors. The purpose of this paper is to discuss how market and government failures influence the design of institutions supporting corporate finance in emerging market economies. Weaknesses in these institutions are an important part of the explanation for why more capital is not flowing from the capital-rich to the capital-poor economies. Even in countries that now enjoy large inflows of direct investment may find weak corporate governance and poorly functioning bankruptcy procedures to be critical if these flows were to corporate governance and bankruptcy laws are generally believed to be critical to investment and growth, they are particularly important in emerging market economies where corporations often are hugely influential in the economy-at-large and in politics. We propose a general framework for thinking about the challenges of designing these institutions in emerging market economies and draw some policy implications. In particular, we emphasize the importance of enforcement and the impact of weak enforcement on corporate governance and bankruptcy design.

Enforcement more than regulations, laws-on-the-books, or voluntary codes is key to effective corporate governance, at least in transition and developing countries. Corporate governance and enforcement mechanisms are intimately linked as they affect firms'ability to commit to their stakeholders, in particular to external investors. The authors provide a framework for understanding these links and how they are shaped by countries'institutional contexts. When the general enforcement environment is weak and specific enforcement mechanisms function poorly, as in many developing and transition countries, few of the traditional corporate governance mechanisms are effective. The principal consequence in these countries is a large block-holder, but there are important potential costs to this mechanism. A range of private and public enforcement"tools"can help reduce these costs and reinforce other supplementary corporate governance mechanisms. The limited empirical evidence suggests that private tools are more effective than public forms of enforcement in the typical environment of most developing and transition countries. However, public enforcement is necessary regardless, and private enforcement mechanisms often require public laws to function. Furthermore, in some countries at least, bottom-up, private-led tools preceded and even shaped public laws. Political economy constraints resulting from the intermingling of business and politics, however, often prevent improvementsin the general enforcement environment, and adoption and implementation of public laws in these countries.