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Title: The effect of corporate bonds spread variability on non-financial firms' financing structure : further evidence from emerging markets
Author: Ndang, Bertrand
Awarding Body: Middlesex University
Current Institution: Middlesex University
Date of Award: 2019
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Understanding the main factors affecting emerging markets economic and financial resilience is of great importance for the global economy stability, financial integration, social development and poverty reduction. In addition, it contributes to a cross-country examination of developmental levels and investment opportunities among markets. A better grip of these factors also permits to highlighting the developmental gap between advanced markets and emerging or developing countries. We begin the research by assessing two economic models the market-based and bank-based models and their contribution to financial stability and economic development. Two different schools of thoughts emerge from the extended literature providing evidences on the key attributes of the two subscripts. In this respect, the literature still has no clear stand on which of the model contribute the most to economic and financial growth. Nevertheless, the neoclassical economy contends that the bank-based model provides better results for economic development and financial growth (Bong-Soo 2012). The defenders of the market-based model evidenced that, the model provide better economic growth through innovation and better risk assessments. Secondly, we investigate economic growth and financial markets in emerging economies. In this respect, there is insightful evidence on this relationship since the groundwork of (Goldsmith 1969; McKinnon 1973; Shaw 1973). The recent increase of interest on the link between economic development and financial stability derived from the perceptions and techniques of endogenous growth models, which demonstrate that there can be a self-sustaining growth without exogenous technical progress; this growth is related to preferences, technology, income distribution and institutional arrangements (Pagano 1993). In this respect, the relationship between financial systems and a country economic growth is not characterized on the contraction of different economic models, particularly on the existence of the two most popular models. Rather, the debate should be extended in examining factors enhancing these two subscripts and their contributions to financial, economic growth and social benefits. Based on the above arguments, the fundamental idea of capital markets development in supports to economic and financial growth initially seen as a perfect means for political and social stability for underdeveloped economies particularly for those with weaker institutional settings, low growth and feebler investors’ protection was well thought. Thus, this is yet to deliver the expected outcome for most emerging economies. Emerging economies have become an integrated part of global markets. Considering the progress operated over the last decades, the size of emerging economies debts has grown faster than developed economies over the last couple of decades due to profitable investments. However, the size of the domestic bonds market and the growth for emerging economies remains very insignificant. Thus, the essential of most financial transactions remain undertaken in many cases by the banking sector, while markets for capital remain unsatisfactorily underdeveloped. In addition to the great presence of banks, there is a large contribution of the state on financial decisions, which undermine the development of free markets and growth opportunities of these economies. Nevertheless, economics and financial studies have promoted in various occasions the benefits linking bond markets efficiency and a country economic growth. In their seminal paper, Smaoui et al. (2017) provide an extended list of bond market development determinants in emerging economies. Ayala, Nedeljkovic and Saborowski (2017) investigate corporate bond boom in emerging economies and demonstrates that capital markets development contributes to economic development and financial stability. The fundamental issues with capital markets in emerging economies relates to the interest rate paid by emerging economies non-financial firms. This generally comes under the risk premium. The differential between the risk-free rate of government bonds and the price paid by firms is the so-called credit spread. The high credit spread on emerging economies asset classes has been subject to important debate over the last decades. Emerging economies business cycles are highly correlated with borrowing costs faced by firms in international financial markets (Uribe and Yue 2006). Nevertheless, the economic theory proposes that in an efficient market, similar forms of financing are formulated to reflect the law of a single price accustomed to risk, transaction costs and embedded options (Angbazo, Mei and Saunders 1998). In accordance to this, current interest rate should reflect the risk undertaken by lenders of risky projects, regardless of the loans seeker country of origin and their economic model. Based on the importance of this topic, it is curious to observe that not many studies have investigated this issue using data from emerging markets. Thus, most of the literature developed on credits risk studies focus on the impact of credit spread on economic performance and the firm’s growth using data from developed markets. These studies demonstrate a negative correlation between high credits spreads, firms’ profitability, economic and financial growth. The contribution of the literature for emerging and developing economies on this specific issue remains worryingly very insignificant. The findings suggest that emerging and developing markets should involve more on financial policy, institutional, regulatory change as well as better resources allocation favouring the construction of sounds financial markets for economic growth. In addition, emerging economies must also establish a strong and reliable banking sector to supports financial markets development to guaranty steady economic growth provision to the overall economy. Particularly, these mechanisms should be developing to support the private sector non-financial firms since these are the central nerf of every market. Based on the above, we suggest investigating the role of financial and economic development on financing decisions for non-financial firms in emerging economies in the context of market and bank-based financial models.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available