Thailand's Corporate Financing and Governance Structures

Abstract

The authors assess Thailand's policy options for reducing large corporations' vulnerability to economic shocks and improving their corporate governance - and for providing smaller firms a more stable funding structure. Using data for firms listed on Thailand's stock exchange, they empirically assess the relative importance of various factors determining the cost of capital, the availability of financing, and policies and distortions that affect corporate governance in nonfinancial firms. The empirical findings highlight weaknesses in corporate governance and the inherent risks in Thailand's corporate financing structures. They conclude that the most important task in improving the structure of corporate financing and the framework for corporate governance is to change incentives. This will involve: 1) Accelerating legal reform, including reform of bankruptcy and foreclosure laws. 2) Improving bank monitoring of enterprise management and encouraging banks to develop more arm's-length relationships with firms. This will require greater transparency and disclosure of ownership relationships and stricter enforcement of insider and related lending limits, violation of which contributed poor intermediation and the recent crisis. 3) Improving disclosure and accounting practices. Self-regulatory agencies may need to play more of a role, possibly with more legal power to discipline violators. 4) Better enforcement of corporate governance rules. The formal structure for corporate governance is standard but enforcement is weak. 5) Facilitation of equity infusions. Investors - especially minority shareholders - may need to play a more direct role in monitoring and disciplining managers. To attract new infusions of equity, new equity owners may need more-than-proportional representation on the board of directors until other investor protection mechanisms are strengthened. 6) Improving the framework for corporate governance. A broad public discussion of corporate governance, similar to recent discussions in the United Kingdom and elsewhere, may be needed to clarify the distribution of control in the economy's real sector. 7) Strengthening institutions responsible for gathering and analyzing data on firms of all sizes and for monitoring firm performance and behavior.