Lowering the cost of capital in emerging market economies

Corporate governance and bankruptcy in emerging market economies should be understood in a broader framework of corporate finance in institutionally weaker environments. In this conceptual paper we provide the outlines of such a framework and identify key trade-offs that can help structure the policy debate. As debt financing from banks is the major source of finance for companies in these economies and bankruptcy is the crucial mechanism for protecting investor rights, corporate governance and bankruptcy reforms are intimately linked. The priorities for these reforms depend critically on the specific institutional context. Consequently, they may differ across countries. In particular, the policy recommendations for emerging market economies are substantially different from those in OECD countries; there is no "one-size-fits-all" solution. Recognizing the need for diverse policy solutions that fit the cultural, political, and economic environment of each particular country, our paper focuses on the core economic principles and mechanisms of corporate governance and bankruptcy in emerging market economies and bow they can help us understand the costs and benefits of various policy options.