ABSTRACT
One of the most typical feature of emerging markets is poor functioning financial markets. Khanna and Palepu (2000) state that “financial markets in emerging markets are characterized by inadequate disclosure and weak corporate governance.” Moreover, “intermediaries such as financial analysts, mutual funds, investment bankers, venture capitalists, and the financial press are not fully evolved.” Since market imperfections make external financing very costly in emerging countries, firms finance their investments internally by creating business groups. Firms affiliated with business groups can benefit from instituting internal relations to mitigate external market failures. 1 Similar institutional context is observed in Turkey. Most of the Turkish corporations listed in stock exchange are affiliated with each other within a business group and have highly concentrated equity ownership. Business groups are organized around a holding company and a bank serving as the main financial source of the business group, which creates well-organized internal capital market. In addition to internal financing opportunities of firms in business groups, Turkish stock market, the Istanbul Stock Exchange (ISE), shows a high development compared to the market capitalization with other emerging markets from 1990 to 1999 (Figure 8.1). The ratio of market capitalization to GDP increases from 12.6 percent with 110 listed firms in 1990 to 60.7 percent with 285 listed firms in 1999.
