Pension Funding and Capital Market Development

Abstract

This paper provides evidence that a country’s pension system is an important determinant for the development of its capital markets. Employing a unique event list of 87 pension funding reforms in 57 countries between 1976 and 2007, we find that pension funding reforms lead to larger stock and corporate bond markets relative to the time before the reforms and relative to other countries without such reforms. This effect is particularly driven by an increase in the post-reform primary market issuing activity and cannot be explained by a simultaneous political move to more market-oriented reforms in these countries in general. We find that the effect is particularly significant in emerging markets with a priori less developed capital markets. Further evidence from a cross-sectional analysis suggests that the degree of pension funding is an important determinant of the cross-country variation in capital market development. It remains robust even after controlling for other important determinants of capital market development such as legal origin and trade openness.

Keywords: Capital Market Development, Pension Funding, Pension Reform, Causality, Event Study, Panel Estimation, Emerging Markets

JEL Classification: G15, G23, O16