The Allocation and Monitoring Role of Capital Markets: Theory And International Evidence

45 Pages Posted: 24 Nov 2003

See all articles by Solomon A. Tadesse

Solomon A. Tadesse

University of Chicago - Booth School of Business; University of Michigan at Ann Arbor; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: October 2003

Abstract

Capital markets perform two distinct functions: provision of capital and facilitation of good governance through information production and monitoring. I argue that the governance function has more impact on the efficiency with which resources are utilized within the firm. Based on industry level data across thirty-eight countries, I present evidence suggesting a positive relation between market-based governance and improvements in industry efficiency. The measures of governance are also positively correlated with productivity improvements and growth in real output. Furthermore, while governance affects efficiency, the capital provision services induce technological change. The evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision.

Note: Previously titled "The Information and Monitoring Role of Capital Markets: Theory and International Evidence"

Keywords: Corporate Governance, Information Aggregation, Monitoring, Economic Efficiency, Productivity, Economic Growth

JEL Classification: G14, G15, G21, G3, G32, G34, E44, 012, 04

Suggested Citation

Tadesse, Solomon A., The Allocation and Monitoring Role of Capital Markets: Theory And International Evidence (October 2003). William Davidson Institute Working Paper No. 624. Available at SSRN: https://ssrn.com/abstract=236102 or http://dx.doi.org/10.2139/ssrn.236102

Solomon A. Tadesse (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of Michigan at Ann Arbor ( email )

Stephen M. Ross School of Business
Ann Arbor, MI 48109-1234
United States

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

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