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June 2016

Informed trading in business groups, ownership concentration, and market liquidity

Alvaro Enrique Pedraza Morales's picture

Institutional investors have become the majority owners of most large corporations and are expected to play a key role for financial development by providing funding for firms, enhancing market liquidity through more active trading, and by promoting better corporate governance in the companies in which they invest.

For developing countries, while most of the literature has focused on the impact of foreign institutional investors on capital markets, little is known about the relation between domestic institutional investors and trading activity, transactions costs, and governance practices. Understanding the role of domestic investors is particularly important since in many of these countries, business groups, which are typically collections of publicly traded companies with significant amount of common ownership, dominate private sector activity. In such context, money management institutions which belong to these business groups are prone to conflicts of interest between their fiduciary responsibilities and the objectives of their own management. For example, business groups’ relations can be used by controlling managers as a mechanism to enhance the entrenchment of corporate control. Alternatively, an institutional investor which belongs to a business group might have access to private information in affiliated firms. Ownership concentration and business group ties potentially exacerbates information asymmetries, discouraging investment.

The Kenyan financial transformation (2000-2015)

Michael King's picture

Giant leaps in financial inclusion driven by private sector innovation and supportive regulation have made Kenya a case study in financial sector development. A new book brings together a group of academics to investigate the myriad of dimensions of and issues that lie beneath Kenya’s much-touted financial inclusion success story. The book is available at this link: Kenya’s Financial Transformation in the 21st Century.

Kenya: A World Leader in Financial Inclusion?

Headline figures from survey data place Kenya at the top of the financial inclusion index both regionally and globally. Data from the last Global Findex survey shows that 75% of Kenyan adults have a formal account that allows them to save, send or receive money. In 2014 Kenya outperformed both the global average and many middle-income countries such as Chile, Brazil, India, Mexico and Russia.

Can wage subsidies boost employment in the wake of an economic crisis?

Miriam Bruhn's picture

Unemployment often rises during an economic crisis and policymakers take a range of actions to try to mitigate this increase. For example, 22 countries around the world used some form of wage subsidy program to promote employment retention during the recent crisis. Many studies have looked at the effect of wage subsidies on employment in non-crisis times, with mixed findings. But, there is not much evidence on whether wage subsidies can raise employment in the wake of a crisis.

Conceptually, wage subsidies during a crisis may make sense since layoffs could slow down the recovery as re-hiring and training workers may be costly for firms. This is particularly true for workers with job-specific skills. For these workers, it may be beneficial for firms to not let them go in the first place. However, as firms face lower demand for their products, they may not have the financial means to keep paying these workers, particularly in the presence of credit constraints, which are often exacerbated during a crisis. This is where wage subsidies come in. But, ultimately, we just don’t know whether these subsidies really cause firms to retain workers they otherwise would not have retained.