Also, it was pointed out that imperfect market conditions can affect the capital structure decisions of many corporate investors in emerging markets. Today, imperfect market conditions remain in many capital markets. These conditions, or market constraints, can affect the contribution of the legal framework for public distribution of securities to the development of a competitive stock exchange in a country such as Zambia. To overcome such problems, proposals were spelt out on the need for capital markets in Eastern and Southern Africa to integrate by moving towards the establishment of a regional stock exchange and the promotion of multiple listing and cross-border trade in securities.
[1] M.T. Porter, "Closed-end Emerging Country Funds Review," in K.H. Park and W. Van Agtmael, (eds), The World's Emerging Stock Markets, (Chicago: Probus Publishers, 1993), p. 459.
[2] See C.B. Barry and L.T. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, Vol. 4, No. 5, (Oxford: Blackwell Publishers, 1995), p. 15.
[3] See id, 16.
[4] See generally K.K. Mwenda, Securities Legislation In Zambia: Areas Needing Strengthening, A Report Presented To The Securities And Exchange Commission Of The Republic of Zambia, Lusaka, June 1998 (unpublished).
[5] See generally, IFC, Emerging Markets Factbook, (Washington: IFC, 1994). See also C.B. Barry and L.T. Lockwood "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, supra., (n. 2) p. 16.
[6] See C.B. Barry and L.T. Lockwood, supra., (n. 2) p. 16.
[7] Ibid.
[8] See Ibid. For authoritative sources from the IFC, see The World Bank Group, Resource Guide For Businesses, (The World Bank: Washington DC, 1998), p.22; and, see generally IFC, Emerging Stock Markets Review: Performance, Valuations, and Constituents Of IFC Daily Index Markets, (Washington DC: IFC, August 1998).
[9] See the section on Emerging-Market Indicators in the weekly issues of the Economist. The list shown above was extracted from issues of the Economist from 20th April 1996 to 30th January 1998. Recently, however, the Economist has added Egypt to this list. See for example the Economist issue of 27th November 1999-3rd December 1999.
[10] See C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, p. 16. See above n. 2 p. 16.
[11] See ibid.
[12] See ibid. See also generally, IFC, Emerging Markets Factbook, see above n. 5.
[13] Whereas the term 'lion markets' refers to stock markets of Africa, the term 'tiger markets' refers to stock markets of the Far East. 'Puma markets', on the other hand, are stock markets located in Latin and South America. The use of 'animal' metaphors here, as is characteristic in a number of works on emerging markets, illustrates the importance of each of the animals mentioned above to the wildlife of the regions to which these animals belong. The lion is associated by many writers with the jungle in Africa and the puma with the forest of Latin and South America whilst the tiger is seen as an animal that is mainly found in Asia and other parts of the Far East.
[14] Evening Standard Newspaper (UK), Thursday 11 July 1996, p. 35.
[15] For a similar view see Ibid., p.35.
[16] see ibid.
[17] See ibid.
[18] The information presented here is valid as at Thursday 11th July 1996. See ibid.
[19] See generally K.L. Gupta, Finance and Economic Growth in Developing Nations, (London: Groom Helm, 1984).
[20] See generally C.B. Barry, "Financial Institutions and Markets and the Economic Development of Four Asian Countries," in Recent Developments in Capital Markets in Turkey: Proceedings of the OECD - CMB Conference, (Istanbul: Capital Market Board, 1986).
[21] See Evening Standard Newspaper (UK), See above n. 14, p.35.
[22] See Nedcor Securities, The Stock Markets of Africa, (London: Nedcor Securities, 1996), p.4; Financial Times, FT500, Thursday January 1996; Evening Standard Newspaper (UK), Thursday 11 July 1996, p. 35.
[23] In 1968 and 1969, there were major economic reforms in Zambia. During these reforms, the Zambian government took-over control from private investors in mining companies and in many non-mining companies.
[24] Letter from the Lusaka Stock Exchange Chief Executive, Mr. C. Mate, to the author sent via electronic mail and dated 26 September 1996. See also Lusaka Stock Exchange, Understanding the Stock Market, (Lusaka: Lusaka Stock Exchange, 1996), p. 1. Although ZCCM Ltd was not privatised at the time when information in the above table was prepared, as a public company, it had some of its shares traded on various stock exchanges in the world; see below. This explains, for example, why ZCCM Ltd appears among the top 20 players on Africa's lion markets.
[25] See explanation in above, n. 24. See also C. Mate, Chief Executive of Lusaka Stock Exchange, "How To Promote Development of Zambian Stock Market," in Financial Mail of Zambia 9th April 1996 p.1, an article responding to this author's article that appeared in Financial Mail of Zambia, 2nd April 1996.
[26] See letter from the Lusaka Stock Exchange Chief Executive, Mr. C. Mate, to this author sent via electronic mail and dated
[26] September 1996.
[27] Price-earnings multiples, like price earnings ratio, is a part of the everyday vocabulary of investors in the stock market. Unfortunately, some financial analysts are confused about what price-earnings ratio and multiples really signify. High price earnings ratio and low multiples often show that investors think that the company has good growth opportunities, that its earnings are relatively safe and deserve a low capitalisation rate, or both. However, companies can have high price-earnings ratios (and low multiples) not because price is high but because earnings are low. A company which earns nothing ('earnings per share' are often called EPS; thus EPS=0, here) in a particular period will have an infinite price earnings ratio as long as its shares retain any value at all. For a detailed reading, see R.A. Brealey and S.C. Myers, Principles of Corporate Finance, (New York: Mcgraw-Hill, 1991), pp. 60-62.
[28] See Evening Standard Newspaper (UK), Thursday 11 July 1996, p. 35.
[29] See Ibid.
[30] See C.B Barry and L.J Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments. See above n. 2, p. 17.
[31] See J.C. Van Horne, Fundamentals Of Financial Management, (London: Prentice-Hall, 1983), p. 436.
[32] This was confirmed by participants at a seminar on "Regulatory Constraints In Emerging Markets: Bank Restructuring and Governance," hosted by the International Law Institute in co-operation with Georgetown University, Washington DC on 26th October, 1999. This author was the convenor and instructor at the seminar. The seminar participants were drawn from Nigeria, Uganda, India and Barbados. These participants were all senior officials of either their home country Central Bank or a leading banking and securities firm in their home country.
[33] See figures 2.1(a), 2.1(b), 2.2 and 2.3, above.
[34] See A. Demirguc-Kunt and V. Maksimovic, Capital Structures in Developing Countries: Evidence from Ten Countries, Policy Research Working Paper 1320, (Washington: The World Bank Policy Research Department, July 1994), p. 3.
[35] Leverage, sometimes referred to as 'gearing', refers to the level of debt in the capital structure of a company. For an elaborate discussion, see E.F. Brigham, Fundamentals of Financial Management, (Chicago: The Dryden Press, 1986), pp. 495-500; R.M. Bowen, L.A. Daley, and C.C. Hubber, Jr., "Evidence on the existence and determinants of inter-industry differences in leverage," Financial Management, (Winter 1982), 10-20; J.M. Gahlon and J.A. Gentry, "On the relationship between systematic risk and the degrees of operating and financial leverage," Financial Management, (Summer 1982), 15-23; G. Donaldson, "New Framework for Corporate Debt Capacity," Harvard Business Review, (March-April 1962), 117-131; and G. Donaldson, "Strategy for Financial Emergencies", Harvard Business Review, (1969), 67-79.
[36] A company's cost of capital is the average rate of return required by investors in the company's securities. See L. Schall and C.W. Haley, Introduction To Financial Management, (New York: McGraw-Hill Book Co. 1980), pp. 191-192.
[37] See generally S.H. Archer and C.A. D'Ambrosio, The Theory of Business Finance: A Book of Readings, (New York: Macmillan, 1967); E. Solomon, "The Arithmetic of Capital Budgeting Decisions," Journal of Business, 29(2), (1956), 124-129; A.A. Robichek and S.C. Myers, Optimal Financing Decisions, (Englewood Cliffs: Prentice-Hall, 1965); M. Bromwich, The Economics of Capital Budgeting, (London: Penguin Education, 1976).
[38] See above.
[39] J.M. Samuels, F.M. Wilkes and R.E. Brayshaw, Management of Company Finance, (London: Chapman and Hall, 1990), p. 445.
[40] Ibid
[41] See M.H. Miller, "Debt and Taxes," Journal of Finance, 32, (1977), 261-276; S.C. Myers, "The capital structure puzzle," Journal of Finance, 39, (1984), 575-592.
[42] See the readings and exact pages cited above in n. 41.
[43] See J.M. Samuels, F.M. Wilkes and R.E. Brayshaw, Management of Company Finance, p 445., see above, n. 39.
[44] Ibid. 44 See J.M. Samuels, F.M. Wilkes and R.E. Brayshaw, Management of Company Finance, above n. 39, p. 144. We will not delve into intricacies of the Modigiliani and Miller hypotheses on capital structuring since that is not the concern of this study. For detailed readings on the Modigiliani and Miller Hypotheses, see F. Modigliani and M.H. Miller, "The cost of capital, corporation finance and the theory of investment", American Economic Review, 48, (1958), 261-296; and F. Modigliani and M.H. Miller, "Taxes and the cost of capital: a correction", American Economic Review, 53, (1963), 433-443. See also S.C Myers, "The Capital Structure Puzzle," in K. Ward, Strategic Issues in Finance, (Oxford: Butterworths-Heinemann, 1994), pp. 261-282, which covers much ground on the static trade-off theory and the pecking order theory; F. Black, M. Jensen and M. Scholes, "The capital asset pricing model: some empirical tests", in M.G. Jensen (ed.), Studies in the Theory of Capital Markets, (New York: Praeger, 1972); E.F. Fama and J. Macbeth, "Risk return and equilibrium: empirical tests," Journal of Political Economy, 71, (May-June 1973), 607-636; and R. Roll, "A Critique of the asset pricing theory's test; Part I: On past and potential testability of the theory," Journal of Financial Economics, 4(2), (March 1977), 129-176.
[45] C.B Barry and L.J Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, Vol. 4, No. 5, (Oxford: Blackwell Publishers, 1995), above n. 2, p. 17. See also generally P.J. Montiel, P.R. Agmnor and N.U. Haque, Informal Financial Markets in Developing Countries, (Oxford: Blackwell Publishers, 1995). In Zambia, for example, the collapse of Meridian Bank Ltd., a local bank that had rapidly grown into a multinational corporation with offices in the United Kingdom and the United States, saw the repeal of the existing banking legislation in Zambia and the replacement of that law with a new banking code, the Banking and Financial Services Act 1994. This move was meant to strengthen the banking regulatory system in Zambia, which among other things, now includes stronger emphasis on investor protection. Furthermore, the Bank of Zambia Act 1985 does require banks to place a statutory stipulated minimum as reserves by way of demand deposits in current account in the Bank of Zambia.
[46] C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 17.
[47] See explanation at above, n. 32.
[48] See C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 17.
[49] See ibid.
[50] As revealed by the field work conducted by this author in Zambia.
[51] See K.K. Mwenda, Corporate Finance Law In Emerging Markets: Zambia's Stock Exchange And Privatisation Programme, Chapter Seven, (forthcoming).
[52] See C.B Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, see above, n. 2, p. 17.
[53] See id., pp. 17-18.
[54] See explanation at above, n. 32.
[55] See generally ibid.
[56] See generally ibid.
[57] R.J. Briston, The Stock Exchange and Investment Analysis, (London: George Allen and Unwin Ltd., 1973), pp. 34-35.
[58] N.F. Stapley, The Stock Market: A Guide For The Private Investors, (Cambridge: Woodhead-Faulkner, 1986), p. 16.
[59] ibid.
[60] See for example A. Galal, L. Jones, P. Tandon and I .Vogelsang, "Synthesis of Cases and Policy Summary," in Proceedings of the World Bank Conference on the Welfare Consequences of Selling Public Enterprises, (Washington: World Bank, 1992); and generally, IFC, Privatization Principles and Practices: Lessons Of Experience Series, (Washington D.C: IFC, 1995).
[61] See generally IFC, Privatization Principles and Practices: Lessons Of Experience Series, above, n. 60.
[62] C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 23.
[63] See M. Boycko, A. Shleifer and R.W. Vishny, "Voucher Privatisation," Journal of Financial Economics, 35, (1994), 249-266.
[64] See ibid.
[65] United Nations, Development Business, Vol. 21, No. 494, (16th September 1998), p. 17.
[66] See R. Penza, Daily Parliamentary Debates, 18th June 1992, p. 104.
[67] M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above n. 1, p. 460.
[68] See International Finance Corporation, quoted in M.T. Porter, "Closed-End Emerging Country Funds Review," in K.H. Park and W. Van Agtmael, The World's Emerging Stock Market, (Chicago: Probus Pub. 1993), p. 461.
[69] See id., p. 460.
[70] M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, (Chicago: Probus Publishers, 1993), above, n. 1, p. 460.
[71] See IFC, Investment Funds In Emerging Markets: Lessons of Experience Series, (Washington D.C: IFC, 1996), pp. 12-15.
[72] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.
[73] See ibid.
[74] See ibid.
[75] See IFC, Investment Funds In Emerging Markets: Lessons of Experience Series, above, n. 71, pp. 12-15.
[76] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.
[77] Ibid.
[78] Ibid.
[79] Ibid.
[80] Ibid.
[81] Ibid.
[82] See generally Nedcor Securities, The Stock Markets of Africa, above, n. 22.
[83] See generally ibid.
[84] M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.
[85] See IFC, Foreign Direct Investment: Lessons of Experience, (Washington D.C: IFC, 1997), pp. 80-88.
[86] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.
[87] See C.B Barry and L.J. Lockwood, C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 21. For an elaborate read on the semi-strong form tests of emerging markets see for example, M. Herrera and L.J. Lockwood, "The Size Effect in the Mexican Stock Market," Journal of Banking and Finance, 18, (1994), 621-632. On the meaning of the term 'market efficiency', see R.A. Brealey and S.C. Myers, Principles of Corporate Finance, above, n. 27, p. 290. R.A. Brealey and S.C. Myers observe: "When economists say that the security market is efficient, they are not talking about whether the filing is up-to-date or whether desktops are tidy. They mean that information is widely and cheaply available to investors and that all relevant and ascertainable information is already reflected in security prices." The concept of efficient markets is a by-product of a chance discovery on how stock and commodity prices behave. In other words, prices of securities on an efficient market follow a random walk.
[88] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 21.
[89] See for example R. Aggarwal and P. Rivoli, "Seasonal and Day-of-the-Week Effects in Four Emerging Stock Markets," Financial Review Studies 1, (1988), 541-550; M. Gultekin and N.B. Gultekin, "Stock Market Seasonality: International Evidence," Journal of Financial Economics, 12, (1983) 469-481; S. Claessens, S. Dasgupta and J. Glen, "Return Behaviour in Emerging Markets," World Bank Economic Review, 9, (1995), 131-151; A. Corhay, G. Hawawini and P. Michel, "Seasonality in the Risk-Return Relationship: Some International Evidence," Journal of Finance, 42, (1987), 49-68.
[90] See L.S. Speidell and R. Sappenfield, "Global Diversification in a Shrinking World," Journal of Portfolio Management, (1992), 57-67; F. Longin and B. Solnik, "Is the Correlation in International Equity Returns Constant 1960-1990?" Journal of International Money and Finance, 14, (1995), 3-26.
[91] See C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 20. See also W. Bailey and J. Jagtiani, "Foreign Ownership Restrictions and Stock Prices in the Thai Capital Markets," Journal of Financial Economics, 36, (1994), 57-87. For a discussion of foreign investor participation on the Korean Stock Exchange prior to 1991, see C.S. Cheung and J. Lee, "Integration vs. Segmentation in the Korean Stock Market," Journal of Business, Finance and Accounting, 20, (1993), 267-273.
[92] See above.
[93] According to R.A. Schwartz, Reshaping the Equity Markets: A Guide for the 1990's, quoted in H.K. Baker, "Trading Location and Liquidity: An Analysis of U.S Dealer and Agency Markets for Common Stocks," Financial Markets, Institutions and Instruments, Vol. 5, No.4, (Oxford: Blackwells Publishers, March 1996), p. 6: A liquid market typically has three attributes - depth, breadth, and resiliency. A market has depth if there are orders both above and below the price at which a security now trades. Depth is lacking when price rounding is substantial and the bid-ask spread is large. On the other hand, a market is broad if the buy and sell orders are both numerous and large. Thus, price changes, in a liquid market, should be invariant to the size of the transaction. Breadth is lacking when the effective spread for large orders is large. By comparison, a market is resilient if new orders pour in promptly in response to price changes that result from temporary order imbalances. Resiliency is lacking when the order flow does not adjust quickly to errors in price discovery.
[94] See Interview with Mr. Mumba Kapumpa, Chief Executive, Securities and Exchange Commission, Lusaka, 18th December 1996: "...the francs CFA countries in West Africa, the French speaking countries, they are setting up a regional stock exchange which will be based in Abidjan most likely, of all the French speaking West African countries. Now they are perhaps in a different position than we are in this region (Southern and Eastern Africa) in the sense that all of them belong to the francs CFA monetary system which is the currency that they all use so that... and they were connected to France such that although they are different independent countries they have always operated from a monetary point of view as one country. Therefore, it would be very easy for them to consider that particular regional stock market."
[95] As revealed by a study conducted in Zambia by this author; Interview with Mr. D.B. Luswili, Management Accountant and Acting Finance Director, Stanbic Bank (Z) Ltd, Lusaka, 12th December 1996.
[96] Similar views were expressed in Interview with Mr. Mebeelo Mutukwa, Stockbroker and Managing Director, Pangea Securities Ltd., Lusaka, 11th December 1996, where Mr. Mutukwa observed that: "there are some companies which are very specific to a country which may not be very attractive on the regional stock exchange and those that continue to sit on the local one, but there should be provision to create SADC (Southern African Development Community) companies and let them graduate after meeting very strict selection criteria onto the regional stock exchange."
[97] On the need to promote cross-listings so as to integrate the markets in the region - Interview with Mr. Charles Mate, Chief Executive, Lusaka Stock Exchange, Lusaka, 20th December 1996; Interview with Mr. Douglas Rolls (Securities Services Manager) and Mr. George Roberts (Manager Merchant Banking), Barclays Bank (Z) Ltd., Lusaka, 12th December 1996; Interview with Mr. D.B. Luswili, op. cit.; Interview with Mr. Peter Yuyi, Manager Securities Brokerage, Emerging Markets Securities, Lusaka, 18th December 1996; and Interview with Mr. Mebeelo Mutukwa, op. cit., - supported this view.
[98] See P. Davis, Gower's Principles of Modern Company Law, (London: Sweet and Maxwell, 1997), p. 395.
[99] For a detailed discussion on the regional integration schemes in Eastern and Southern Africa, see generally K.K. Mwenda, "Legal Aspects of Regional Integration: COMESA and SADC on the Regulation of Foreign Investment in Southern and Eastern Africa," African Journal of Comparative and International Law, (The African Society of International and Comparative Law, UK, June 1997, Vol.9, Pt.2).
[100] See Heads of State and Government of the PTA, PTA Trade And Development Strategy, (Lusaka: PTA Publication, 30-31 January, 1992), p. 30.
[101] See below for a fuller discussion.
[102] See for example The European Convention On Jurisdiction And The Enforcement Of Judgements 1968. For detailed readings on enforcement of foreign judgements see A. Lowenfeld, International Litigation And Arbitration, (St. Paul, Minnesota: West Publishing Co., 1992), pp. 368-450; Henry v. Geoprosco International Ltd. [1976] Q.B. 726 (C.A.); Somportex Limited v. Philadelphia Chewing Gum Corporation [1968] 3 All E.R. 26; Somportex Limited v. Philadelphia Chewing Gum Corporation 92 S.Ct 1294, 31 L.Ed.2d 479 (1972); Elefanten Schuh GmbH v. Jacqmain [1981] E.C.R. 1671, [1982] 3 C.M.L.R 1; Etablissement Rohr S.A. v. Ossberger [1981] E.C.R. 2431, [1982] 3 C.M.L.R. 29; Hilton v. Guyot 159 U.S. 113, 16th S.Ct. 139, 40 L.Ed. 95 (1895); Johnston v. Compagnie Generale Transatlantique 242 N.Y. 381, 152 N.E. 121 (1926).
[103] In Factor v. Laubenheimer, 290 U.S 276, 287, 54 S.Ct. 191, 78 L.Ed 315 (1933), it was held that "[t]he principles of international law recognise no right to extradition apart from treaty. While a government may, if agreeable to its own constitution and laws, voluntarily exercise the power to surrender a fugitive from justice to the country from which he has fled ... the legal right to demand his extradition and the correlative duty to surrender him to the demanding country exist only when created by treaty."
[104] See M. Dixon, Textbook On International Law, (London Blackstones, 1990), p. 70.
[105] The COMESA Court of Justice was established pursuant to the COMESA Treaty. For a fuller discussion on this see K.K. Mwenda, Legal Aspects of Corporate Capital and Finance, (Washington DC: Penn Press, 1999), Chapter Five.
[106] Heads of State and Government of the PTA, PTA Trade And Development Strategy, op. cit., p. 30.
[107] See ibid.
[108] See id, p. 29.