Pension Reform, Insitutional Investors' Growth and Stock Market Development in the Developing Countries? Does it Function?
51 Pages Posted: 1 Apr 2009
Date Written: March 31, 2009
Abstract
For almost one decade, the developing countries have tried to spur the development of their local capital markets. However, despite the initiated macroeconomic and financial reforms, the performance of the securities markets has remained relatively weak for most of the time. The recent dramatic growth of the institutional investors' assets has raised new hope for these countries. In this paper, we evaluate an empirical link between recent institutional assets' growth, institutional behaviour and stock market performance in the developing countries. Using the GMM technique on the panel of eight Central and Eastern European (CEE) developing countries over the period of 1994-2006, our results indicate that institutional development exerts a robust and significant impact on the securities markets' growth in the developing countries. In particular, we find that institutional investors contribute to the greater activity of the emerging capital markets and this effect is a result of higher demand for the local securities induced by these institutions. In addition, in countries where the institutional investors actively participate in the corporate governance, their presence possibly reduces the cost of capital for firms and also positively influences the stock market capitalization. Our findings suggest that the pension reform has contributed significantly to the institutional development and stock market growth in the CEE countries. However, we find that magnitude of these effects depends on the pension scheme a country relies upon. These effects are also exogenous to the structure of the economy in these countries.
Keywords: capital market development, capital market reforms, financial structure, institutional investors, pension reform
JEL Classification: G18, G22, G23, O16
Suggested Citation: Suggested Citation
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