Corporate bond markets in developing countries: A BSC based - PowerPoint PPT Presentation

1 / 22
About This Presentation

Corporate bond markets in developing countries: A BSC based


Corporate bond markets in developing countries: A BSC based approach to solving the problem of information asymmetry Saidiev Ulugbek KAIST ITTP – PowerPoint PPT presentation

Number of Views:47
Avg rating:3.0/5.0
Slides: 23
Provided by: innodevO


Transcript and Presenter's Notes

Title: Corporate bond markets in developing countries: A BSC based

Corporate bond markets in developing countries
A BSC based approach to solving the problem of
information asymmetry
  • Saidiev Ulugbek

  • Financial markets essentially involve the
    allocation of resources. They can be thought of
    as the "brain" of the entire economic system, the
    central locus of decisionmaking if they fail,
    not only will the sector's profits be lower than
    they would otherwise have been, but the
    performance of the entire economic
  • system may be impaired
  • J. E. Stiglitz, J. Jaramillo-Vallejo, and Y-C
    Park, 1993

  • Introduction
  • Importance of corporate bond market for
    developing countries
  • Major problems and challenges in developing the
    corporate bond market
  • How BSC based approach can help in developing
    the strategy on bond market development

  • Korea, China, Japan and the 10 members of ASEAN
    have agreed to create a US700 million facility
    in 2011 to back up bonds issued by Asian firms
  • ADB will contribute 130 million to the facility
    and Japan 200 million.
  • The new organization will guarantee local
    currency bonds issued by Asian companies and
    receive premiums, with the main focus on debt to
    finance infrastructure projects.
  • The aim is to create an environment that supports
    corporate debt issuance in Asia, because profits
    made by exporters in the region end up being
    invested in the U.S. and Europe
  • The launch of the facility would enable lesser
    known Asian companies to raise long-term capital
    in emerging Asian markets
  • Source Nihon Keizai Shimbun, May 19, 2010

Introduction (cont.)
  • Given that the process of formation a national
    corporate bond market is very complex, predicted
    outcomes are not typically unique that extremely
    important constraint for policy and decision
  • Even for those cases where structure for bond
    market is assumed as unique, the coordination
    problem between agents involved at the different
    stages of the market roll-out still remains
  • In general corporate bond market development in
    developing countries requires balanced set of
    measures and targets for managing all relevant
    major strategic themes
  • Literature on bond market is presented
    considerably poorer than on stock, bank credit
    and insurance markets
  • Characteristics of bonds OTC based trading,
    relatively lower liquidity, specific determinants
    of price setting

Introduction (cont.)
  • This presentation discusses corporate bond market
    in developing countries. More particularly, it
    investigates how adverse selection and moral
    hazard, two main problems caused by information
    asymmetry, harm to potentially beneficial
    coordination within economic agents and limit the
    corporate bond market development
  • We also consider what can be learned from social
    networks formation for understanding and
    designing bond market structure
  • We introduce a balanced scorecard (BSC) based
    management system linking a country level
    strategy and operations plan for bond market
  • The recommendations are mainly addressed to
    financial policy makers.

Major exporters of capital in 2009 Source IMF,
World Economic Outlook database as of March 10,
Major importers of capital in 2009 Source IMF,
World Economic Outlook database as of March 10,
Why local bond market is so important for
developing countries?
  • Crises in Mexico and Argentina in 1995 and 2002
    and East Asian countries and Russia 1997-1998
    demonstrated the vulnerability of dominance of
    bank loan based financing. Access to bond markets
    came to be seen as an essential spare tire
    (Eichengreen et al, 2006)
  • Crisis of 2008 showed that financial resources
    run away from developing markets toward developed
  • Although globalization made investment more
    accessible for developing markets (Frankel and
    Schmukler, 1997) most part of the developing
    world still needs in funds for basic
    infrastructure and social development projects
  • Bond market is less volatile comparing to stock
    or derivatives markets
  • Modern information and communication
    infrastructure create new opportunity for
    building an on-line network for global bond

Why local bond market in developing countries is
important for capital-rich countries?
  • Kool (2005) argues that although in theory
    capital is expected to move from mature economies
    with excessive savings toward economies with
    productive capacity growth potential, in practice
    countries with developed capital markets obtain
    major share of the world excess savings
  • Excessive cash flow can lead to inefficiency of
    firms investments (Jensen, 1986)
  • This together with growing instability of
    financial markets may lead to dissaving in
    countries with mature economies and aging
  • Good timing now, after the global financial
    crises of 2008, governments, international
    finance institutions, and major traders seek for
    new and more sustainable ways of building the
    global financial architecture

Asymmetric Information
  • Asymmetric information refers to a situation
    where one side of the market has a better
    information than the other
  • This may show up in different ways
  • One group of potential investors may have better
    (or less costly access) to information than
    other. For instance, domestic investors vs.
    foreign ones, or a commercial bank vs. investment
  • Firm managers due to different reasons and
    conditions can be better informed regarding bank
    loan or stock issuance than debt funding
  • Some investor can be better informed in certain
    regional or industrial segments than others
  • Perception of business risk which a firm may
    accept can be different for managers and

Asymmetric Information two main problems
  • Adverse selection (hidden information) problem
    arise from the asymmetry of information regarding
    riskiness of the project before occurrence of
    the transaction
  • Moral hazard (hidden action problem) refers to
    the situation which may occur after the
    transaction when the agent pursues self- interest
    conflicting to the principals interest. More
    particularly, moral hazard is actions by economic
    agents which maximize their own utility without
    bearing the full consequences of their actions
    and detriment others position

Adverse selection
  • Akerlov in 1970 in his seminal lemon paper
    showed how information asymmetry may cause to
    complete break down of a market
  • Genesove (1993) considers a theoretical model
    with buyer in search of good apple and two
    distinct types of sellers one who has large
    orchard and hates apples and a second who has
    small orchard and loves apples
  • Genesove shows that while only the seller is able
    to discern true quality of apples, the buyer
    prefers to purchase from the first seller because
    in this case by incorporating the information on
    seller type the buyer can improve on the estimate
    of the average apple
  • These theoretical findings have extremely
    important implication for understanding how
    financial markets work and should be designed.
    Particularly, they explain role of mediating

Moral hazard
  • In the financial world moral hazard usually
    occurs because borrowers has incentives to invest
    in in projects with risks unacceptable for
    lenders. This problem leads to lending and
    investment at sub-optimal levels
  • Ely (1999) states argues that moral hazard leads
    to financial crisis in three situations
  • Bad management
  • Economic contagion
  • Government restrictions on asset and geographical
    risk dispersion
  • Solutions
  • Better corporate governance
  • Diversification of risks
  • Better information sharing

What can studies on social network formation tell
  • The theoretical literature on network formation
    follow a game-theoretical approach implying that
    players earn benefits from being mutually
    connected both directly and indirectly and bear
    costs for maintaining direct links (see Jackson
    and Wolinsky, 1996 Bala and Goyal, 2000)
  • To explore network formation behavior Cagno and
    Sciubba (2008) run a computerized experiment in
    which players simultaneously submit link
    proposals and connection is made only when both
    players involved agreed
  • For the first treatment with low cost of
    maintaining direct links, the authors show that
    any minimally connected network is both pair wise
    stable and efficient
  • In the second treatment with high cost, the
    theoretical prediction for a stable architecture
    is unique but inefficient

What can studies on social network formation tell
us? (cont.)
  • For the low cost treatment convergence to a
    stable network architecture is problematic due to
    coordination problem and multiplicity of
  • Interestingly, the authors find lack of
    convergence into a stable network also for the
    treatment with high cost, despite to the fact
    that equilibrium here is unique and does not
    require much coordination.
  • Despite to the lack of convergence, Cagno and
    Sciubba report stronger tendency to inclusion in
    the low cost treatment
  • The most commonly observed deviation from stable
    network formations are 1)over-connectedness
    (redundancy of links) and 2) minimally connected
    graph reached earlier on in the session are
    later departed from
  • Main drivers of network formation best response
    behavior, attempt to coordinate on efficient

How network formation features show up in
evolving of financial markets
What should to do?
  • Accept that natural self-evolution of corporate
    bond markets in capital-poor countries may take a
    very long time while this has extremely important
    implication for sustainable economic conditions
    both for developed and developing countries
  • International financial organizations should lead
    the process in order to exploit fully the effect
    of positive externalities for provision of price
    setting and liquidity of corporate bonds, to
    synergize private businesses, states and
    international initiatives toward developing
    global bond market
  • Introduce a common standardized non-banking
    mechanism, protocols and open platform linking
    lenders, borrowers and guarantors worldwide

The management system Linking strategy to
operations (Source Kaplan and Anderson,
Execution Premium, 2008)
An approximate structure of operational
excellence strategic theme for corporate bond
market development project
Roles of project implementation units
  • Role as architect
  • Role as a process owner
  • Developing the strategy
  • Planning the strategy
  • Aligning the organization
  • Reviewing the strategy
  • Adapting the strategy
  • Role as integrator
  • Linking the strategy to financial resource
    planning and budgeting
  • Aligning plans and recourses to important
    supporting groups
  • Communicating the strategy
  • Managing strategic initiatives
  • Linking strategy to key operating processes
  • Sharing best practices
  • Adapted from Kaplan and Anderson, Execution
    Premium, 2008

  • Akerlof, G. (1970). The Market for Lemons
    Quality Uncertainly and the Market Mechanism,
    Quarterly Journal of Economics, vol. 84, no. 3,
  • Bala, V., and Goyal, S. (2000). A
    non-cooperative model of network formation.
    Econometrica, 68(5), 11811229
  • Cagno D.D., and Sciubba E., (2008). The
    Determinants of Individual Behavior in Network
    Formation some Experimental Evidence, In M.
    Abdellaoui, J.D. Hey (eds.) Advances in Decision
    Making Under Risk and Uncertainty.
    Springer-Verlag Berlin Heidelberg , 219-241.
  • Eichengreen, B., Borensztein, E., Panizza, U.
    (2006). A Tale of Two Markets Bond Market
    Development in East Asia and Latin America, Hong
    Kong Institute for Monetary Research.
  • Ely, B. (1999). Regulatory Moral Hazard,
    Independent Review, volume4, no. 2, 241255.
  • Frankel, J. A. and Schmukler, S. L. (1997).
    Country Funds and Asymmetric Information, Centre
    for International and Development Economic
    Research, Working Paper no. C97-087, California
    University of California at Berkeley.
  • Genesove, D. (1993), Adverse Selection in the
    Wholesale Used Car Market, Journal of Political
    Economy, vol. 101, no. 4, 644665.
  • Jackson, M. O., Wolinsky, A. (1996). A
    strategic model of social and economic networks.
    Journal of Economic Theory, 71(1), 4474.
  • Jensen M.C. (1986). Agency Costs of Free Cash
    Flow, Corporate Finance, and Takeovers. The
    American Economic Review, Vol. 76, No. 2, 323-329
  • Kaplan, R.S., Anderson,S.R. (2008). Execution
    Premium, Harvard Business School Press.
  • Kool ,C.J.M., The Global Market for Capital
    Friend and Foe. (2003). In Gijsel and H.
    Schenk (eds.), Multidisciplinary Economics,
  • Stiglitz J. E. , Jaramillo-Vallejo, J. and Park
    Y.-C . (1993). The Role of the State in Financial
    Markets, World Bank Research Observer, Annual
    Conference on Development Economics Supplement
Write a Comment
User Comments (0)