When Do Emerging Economies Need Domestic Equity Markets?
Posted: 8 Dec 1997
Date Written: October 1997
This paper examines the conditions under which companies and investors in emerging economies will benefit from the development of domestic stock markets. It is shown how the development of both domestic and foreign stock markets reduces cross-border investment and information barriers, integrating markets, expanding the shareholder base and reducing the cost of capital for domestic companies. With perfect inter-market information transparency, expected trading costs for uninformed investors declines in both the domestic and foreign market, enhancing the ability of domestic investors to hedge liquidity risk. Current proposals for the development of regional stock exchanges in the Nordic countries, Africa and Central America provide benefits over existing domestic markets by expanding the shareholder base and attracting a critical mass of speculators. However, international cross-listings in the major financial centers, such as New York and London, and index funds such as WEBS can be more effective than regional exchanges, closed-end country funds and the liberalization of investment restrictions on domestic markets in reducing the cost of capital for domestic companies and improving market liquidity because of their ability to integrate markets with greater inter-market information transparency.
JEL Classification: G14, N76, O16
Suggested Citation: Suggested Citation