DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

FIGURE 7.1More investor protections associated with greater access for firms to equity marketsand faster stock turnover34 Doing Business 2009Perceived Overviewdifficulty in access to equityTurnover of stocks traded (%)Most75Starting a businessdifficultFIGURE 7.1Dealing with construction permitsMore investor protections associated with greater access for firms to equity markets50 and faster stock turnoverEmploying workersPerceived difficulty in access to equityTurnover of stocks traded (%)Registering property25 Most75Getting creditdifficultLeastdifficult050LeastMostLeastMostprotectionprotectionprotectionprotectionEconomies ranked byEconomies ranked by25Paying taxesNote: Relationships remain significant at the 5% level when controlling for income difficultper capita. Economies are ranked on the perceived difficulty 0strength of investor protection index, quintilesLeaststrength of investor protection index, quintilesTrading access to equity, across with borders 131 being the most difficult. See Data notes for details. LeastMostLeastMostSource: Doing Business database; WEF (2007); World Bank, World Development Indicators protectiondatabase.protectionprotectionprotectionEnforcing contractsEconomies ranked byEconomies ranked byClosing a businessstrength of investor protection index, quintiles strength of investor protection index, quintilesProtectinginvestorsFIGURE 7.3Note: Relationships remain significant at the 5% level when controlling forFIGUREincome per7.4capita. Economies are ranked on the perceived difficultyin access to equity, with 131 being the most difficult. See Data notes for details.Accelerating reforms in Eastern Europe & CentralSource: DoingAsiaBusiness database; WEF (2007); World Bank, World DevelopmentTop 4 reformIndicators database.featuresNumber of reforms strengthening investor protectionsin protecting investorsby Doing Business report yearReforms including feature since DB2006 (%)Investing in DB2006 Costa Rica DB2007 can be a DB2008 risky protections for DB2009 investors explains up to rankings on the index with 29 and 28 ofbusiness. Diego, a Costa Rican entrepreneur,Central is Asia well aware of that: “Why would trast, Accelerating company reforms characteristics in Eastern Europe explain 12 & Central Increased ate disclosure Asia disclosure of requirementsa related-party transac-73% FIGURE of 7.3the decision to invest. In con-30 possible points, both require immedi-47%Eastern Europe&(28 economies)NumberI buy shares in a company if I know its only between 4% and 22%. 1 of reforms strengthening investor protectionsThus both by Doing Business tion report and year of the conflict of interest (tableOECD33%high management income can approve large transactionseconomies) between interested parties without terest Eastern in Europe reforms strengthening investor transaction by the other shareholders.governments DB2006 and businesses DB2007have an in-7.1). They require prior approval of the12 DB2008 DB2009Defined duties for directors(24& Central Asia12East ever Asia disclosing them to its shareholders?” protections.(28 economies)They enable the 22% shareholders to hold the& In Pacific10Costa Rica, as in many other countries Without investor protections, equityhigh income markets fail to develop and banks tion voided if it damages the company. 12directors liable and to have the transac-(24 economies)OECDRegulated approval of related-party transactionsaround the world, minority investors areLatin America(24 economies)& not Caribbean protected against self-dealing—the become 6 the only source of finance. The And in 13% New Zealand shareholders can(32 use economies) by company insiders of corporate assetsfor East personal & gain.size (24 economies) for lack of financing, and economic deciding whether to sue.result: East Asiabusinesses fail to reach efficient Allowed inspect shareholder all internal access documents before& Pacificto corporate documents 10MiddleNorth Africa6Companies grow by raising capital growth is held back. Research in 22 Note: A reform Vietnam may include shows several the reform benefits features. of reforms6 to strengthen investor protections.(19 economies)Latin AmericaSource: Doing Business database.—either through a bank loan or by attractingequity investors. Selling 3 shares where investors have little recourse In 2005, before Vietnam adopted clearemerging & Caribbeanmarket economies shows thatSub-Saharan(32 economies)Africa(46 allows economies) companies to expand without the against Middle East actions & that damage the company,(19 economies) they invest in a few companies saw 60–100 daily trades with a value oflegislation, its unregulated stock marketNorth Africa6South need Asia to provide collateral and repay bank2(8 loans. economies) But investors worry about getting in Sub-Saharan which they take majority stakes. 2 In $10,000–16,000. That was 3–6 times thetheir money back—and look for laws Africa contrast, good protections for 3minoritytrading volume of the regulated Ho ChiNote: A reform is counted as 1 reform per reforming economy per year.(46 economies)Source: that Doing protect Business them. database. A recent study finds shareholders are associated with larger Minh Stock Exchange. 4 After reform ofthat the presence of legal and regulatory South and more Asia active stock markets.the Law on Securities and the Law on2(8 economies)FIGURE 7.5Vibrant stock markets are not theTop Table reformers 7.1 in 2005–08FIGURE 7.2only Note: A reason reform is counted to introduce as 1 reform per stronger reforming economy inves-petor year.in Where protecting are investors protected—andSource:protections.Doing Business database.Rankings on protecting investorsTanzania started reformswhere not?are based on 3 subindicatorsAverage improvement (index 0–10)of investor protections as part of a largerMost 2008 protected Rank Least protected RankRequirementsLiability of CEOinitiative FIGURE 7.5 to reduce corruption and create on approval and disclosure and board of directorsNew Zealand 1 Micronesia +1.4 172 an Top environment reformers in 2005–08of related-partyin related-party+2.4that inspires the trustSingapore 2 Palau 173 in protecting investorsneeded to do business. 3 transactionstransactionsSuch an environmentstrengthens investor confidence in33.3% 33.3%ExtentHong Kong, China 3 Rwanda 174 Average improvement (index 0–10)Extent of2005of directorMalaysia +2.7 4 Venezuela 175 2008disclosure liabilityCanada 5 Vietnam 176 local businesses and government alike.index index+1.4Ireland 6 Djibouti 177 Economies +2.4 that rank high on the33.3%Israel 7 Suriname 178 strength of investor protection indexEase of shareholderUnited States 8 Swaziland 179 2005have extensive disclosure +2.7 requirementssuits indexSouth Africa 9 Lao PDR 180 and give shareholders broad access toUnited Kingdom 10 Afghanistan 181Type of evidence that can be collectedExtent of Extent of Ease of information both before and during trialsto determine director liability. Newbefore and during the trialNote: disclosureRankings are based director on the strength shareholderof investor protectionindex. See index Data notes liability for details. index suits indexNote: See Data notes for details.Zealand and Singapore, which top theSource: Doing Business database.Source: Doing Business database.Extent of Extent of Ease ofdisclosure director shareholder(c) The International Bank indexfor liability Reconstruction index suits and Development index / The World BankFIGURE 7.4Top 4 reformin protectinReforms includIncreased disclDefined dutiesRegulated app13%Allowed sharehto corporate doNote: A reform maySource: Doing BusinFIGURE 7.2Rankings onare based oRequirementson approval anof related-parttransactionsType ofbNote: See Data n