THE SUBCULTURE OF SHADOW ECONOMY AND ITS IMPACT ON THE COST OF EQUITY OF ENTERPRISES AT EMERGING MARKETS

The aim of proposed research is to find out how the risks of activity in shadow and official sectors of economy correlate and how it affects on economic agents' calculation concerning expected rate of return on capital. In the paper it is shown, that high tax rates, poor economic legislation and weakness of state institutions only partially explain the phenomenon of high share of shadow economy in many emerging market economies. Major part of reasons for this lies in specific subculture of shadow business, which does not imply implementation of clear, fair and transparent corporate governance standards that are understandable to all game rules. It is identified that high local risks require high expected market risk premium that cannot be fully realized within the frames of official sector. Therefore, shadow business activity is mostly focused on withdrawing income into the shadow. The consequence of this is shadowing of the cost of equity. It is justified that indicator of increased risks in official sector in comparison with shadow is presence of negative correlation connection between share of shadow economy and capitalization of listed companies in particular countries. Shadow economy significantly impacts on both capitalization of the stock market and risks that determine the cost of equity. For countries with high level of shadow economy, low values of capitalization of listed companies and high values of local risk premium are characterized. In article it is proved that besides direct damage in the form of underpaid tax payments and incomes to social funds, negative consequence of shadow economic activity is the effect of official economic activity's displacement and deformation of economy's structure. For analysis of reasons of shadow economy high share, the basic model of decision-making concerning the income shadowing is expanded by introducing two additional parameters: direct corruption costs and alternative costs that arise from displacement effect. According to analysis' results it is determined that under certain circumstances the risks of activity in shadow sector are lower than in official one, and accordingly, rate of return on investments expected by investors will also be lower. To the model of calculation of expected rate of equity cost it is proposed to enter additional parameter - premium for the risks of incomes shadowing. By logic of shadow economy subculture, activity in shadow sector is less risky than doing business in official one. The conclusion is made, that transferring incomes in shadow economy is a way of minimization corruption, political, criminal and currency risks. Thus, risks of official cost of equity are lower than the risks of shadowing incomes and risk premium becomes negative. This means that expected shadow return (cost of equity) will be lower than official return. Negative risk premium for shadow business activity is due to the risks connected with displacement effect are higher than risks connected with the possible fees for hiding shadow incomes.