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Abstract:
Do well-functionning stock markets and banks promote long-run economic growth? This paper shows that stock market liquidity and banking development both positively, predict growth, capital accumulation, and productivity improvements when entered together in regressions, even after controlling for economic and political factors. The results are consistent with the views that financial markets provide important services for growth, and that stock markets provide different services from banks. The paper also finds that stock market size, volatility, and integration with world markets are not robustly linked with growth, and that none of the financial indicators is closely associated with private saving rates.

Abstract:
Do well-functioning stock markets and banks promote long-term economic growth? Yes, but stock markets and banks differ in the financial services they provide.

Using data on 49 countries from 1976 to 1993, the authors investigate whether measures of stock market liquidity, size, volatility, and integration in world capital markets predict future rates of economic growth, capital accumulation, productivity improvements, and private savings.

They find that stock market liquidity-as measured by stock trading relative to the size of the market and economy - is positively and significantly correlated with current and future rates of economic growth, capital accumulation, productivity growth, even after controlling for economic and political factors.

Stock market size, volatility, and integration are not robustly linked with growth. Nor are financial indicators closely associated with private savings rates.

Significantly, banking development - as measured by bank loans to private enterprises divided by GDP - when combined with stock market liquidity predicts future rates of growth, capital accumulation, and productivity growth when entered together in regressions. The authors determine that these results are consistent with views that (1)financial markets and institutions provide important services for long-run growth, and (2)stock markets and banks provide different financial services.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the links between the financial system and economic growth. The study was funded by the Bank's Research Support Budget under the research project "Stock Market Development and Financial Intermediary Growth" (RPO 679-53).

Abstract:
Is there a strong empirical association between stock market development and long-term economic growth? Cross-country regressions suggest that there is a positive and robust association.

Levine and Zervos empirically evaluate the relationship between stock market development and long-term growth. The data suggest that stock market development is positively associated with economic growth. Moreover, instrumental variables procedures indicate a strong connection between the predetermined component of stock market development and economic growth in the long run.

While cross-country regressions imply a strong link between stock market development and economic growth, the results should be viewed as suggestive partial correlations that stimulate additional research rather than as conclusive findings. Much work remains to be done to shed light on the relationship between stock market development and economic growth. Careful case studies might help identify causal relationships and further research could be done on the time-series property of such relationships.

Research should also be done to identify policies that facilitate the development of sound securities markets.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to study the relationship between financial systems and economic growth. The study was funded by the Bank's Research Support Budget under the research project Stock Market Development and Financial Intermediary Growth (RPO 679-53).

Abstract:
The authors address two questions: What happens to stock market size, liquidity, volatility, and integration with world capital markets after capital controls are liberalized? And what is the relationship between those indicators of stock market development and regulations about information disclosure, accounting standards, and investor protection? An analysis of data on stock markets in 16 developing countries suggests the following: a) stock markets become larger, more liquid, more integrated internationally, and more volatile after controls on capital and dividend flows are liberalized; b) easy access to information about firms is positively associated with the size and liquidity of stock markets; and c) countries that officially establish internationally accepted accounting standards and laws to protect investors do not have substantially better- functioning stock markets than countries that do not adopt those official standards.

Abstract:
Zervos documents the precise costs of debt and equity issuance, both domestically and internationally, for firms in Brazil, Chile, and Mexico. Costs include investment banking and legal fees, regulatory and exchange listing costs, rating agency fees, and expenditures for marketing and publishing. Her findings suggest that Brazilian firms face similar costs in issuing debt locally or abroad, whereas domestic equity issuance is nearly twice as expensive as debt. While the Chilean domestic corporate debt market is well developed by emerging market standards (size of the market and maturity of issues), Chilean firms can issue debt more cheaply internationally than at home. In addition, while equity financing is cheaper in Chile from a transaction cost perspective, over the past decade most firms have used bonds rather than shares to raise capital. This financing trend is true in all three countries. Finally, Mexican firms can issue debt at the lowest costs of the three, but face the highest equity issuing costs. In addition to documenting these features, the author sheds light on how the investor base in these countries plays a strong role in influencing the ability of firms to access domestic capital markets.

This paper - a product of the Financial Sector Operations and Policy Department - is part of a larger effort in the department to understand and promote private sector financing in emerging markets.

Primary markets, issuance, transactions costs, financing patterns

Abstract:
Ladekarl and Zervos look at the investment allocation process employed by portfolio investors in emerging markets. In particular, they examine the first of a two-stage decision process: First, investors create a subset of investable countries to be analyzed later in further detail; second, they weigh expected returns versus risk and subsequently allocate their funds. The authors hypothesize that the determination of whether a country is investable or not is influenced by a number of factors, especially related to size, quality of housekeeping, (macroeconomic policies, political economy, local financial markets, corporate governance, and so on), and efficiency of plumbing (legal and regulatory framework, custody, clearing and settlement, taxes, and so on). By interviewing many types of these investors in both the United States and the United Kingdom, the authors delve into their decision-making processes as well as attempt to uncover the factors they indicate matter most in defining the investable universe. They determine the relative importance of such housekeeping and plumbing factors while highlighting the role of external issues, such as index benchmarking and U.S. foreign policy. The authors recognize from the outset that the most profound effects on investment flows, or the required minimum expected returns, arise from improvements or deteriorations in macroeconomic policies. However, at the margin, improvements can be made in country policies that will, for a given macroeconomic situation, improve the ability of a country to attract international investment flows.

This paper - a product of the Financial Sector Operations and Policy Department - is part of a larger effort in the department to study the functioning of pension funds and other institutional investors.

Portfolio investors, portfolio flows, emerging markets, investability, investment allocation, investment guidelines, index benchmark