Gambia Ranked Poor in Investor Protection, Access to Credit
Wednesday, December 28, 2011
WHY PROTECTING INVESTORS MATTERS? Minority investor protections can have important implications for firm valuation. Researches on 539 large firms in 27 economies show that firm valuation is higher in economies with good investor protection than in those with poor protection. Other researches show that corporate risk-taking and firm growth rates are positively related to the quality of the system of investor protection. Better systems may lead corporations to undertake riskier but value-enhancing investments. However, the Doing Business report, which was prepared in collaboration with the International Finance Corporation (IFC), measures the strength of legal protections of minority investors against misuse of corporate assets by company directors for their personal gain. The indicators distinguish three dimensions of investor protections: rules on the approval and disclosure of related party transactions (extent of disclosure index), liability of company executives for self-dealing (extent of director liability index), and shareholders’ ability to access corporate information before and during litigation (ease of shareholder suits index). The standard case study assumes a related-party transaction between Company A (“Buyer”) and Company B (“Seller”) where “Mohamed Keita” is the controlling shareholder of both Buyer and Seller and a member of both their boards of directors. The transaction is overpriced and thus causes damages to the Buyer. In the report, a high ranking indicates that an economy’s regulations offer stronger investor protection against self-dealing in view that stronger legal protection make minority investors more confident about their investments, reducing the need for concentrated ownership to mitigate weaknesses in corporate governance. Therefore, investor protection matter for the ability of companies to raise the capital needed to grow, innovate, diversify, and compete. “Without investor protections, equity markets fail to develop and banks become the only source of finance. Economies that have dynamic capital markets tend to effectively protect investors; thus making investors receive financial information they can trust; they participate in major decisions of the company, and directors are accountable for their managerial decisions. If the laws do not provide such protections, investors may be reluctant to invest, unless they become controlling shareholders,” the report explained.
Author: Amat JENG is a journalist, blogger and social media activist. He is the publisher and editor of www.mediarevolution-amat.blogspot