Capital Markets and Capital Allocation: Implications for Economies in Transition

42 Pages Posted: 3 Dec 2004  

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Randall Morck

National Bureau of Economic Research (NBER); University of Alberta - Department of Finance and Statistical Analysis

Bernard Yin Yeung

National University of Singapore - Business School

Kan Li

Independent

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Abstract

Recent work showing that a sounder financial system is associated with faster economic growth has important implications for transition economies. Stock prices in developed economies move in highly firm-specific ways that convey information about changes in firms' marginal value of investment. This information facilitates the rapid flow of capital to its highest value uses. In contrast, stock prices in low-income countries tend to move up and down en masse, and thus are of scant use for microeconomic capital allocation. Some transition economy markets are coming to resemble those of developed economies, others those of low-income countries. Stock return asynchronicity is highly correlated with the strength of private property rights in general and public shareholders' rights in particular. Other recent work suggests that small entrenched elites in low-income countries preserve their sweeping control over the corporate sectors of their economies by using political influence to undermine the financial system and deprive entrants of capital. The lack of cross-sectional independence in some transition economies' stock returns may be a warning of such economic entrenchment. Sound property rights, solid shareholder rights, stock market transparency, and capital account openness appear to check this, and thus contribute to efficient capital allocation and economic growth.

Suggested Citation

Durnev, Art and Morck, Randall and Yeung, Bernard Yin and Li, Kan, Capital Markets and Capital Allocation: Implications for Economies in Transition. Economics of Transition, Vol. 12, No. 4, pp. 593-634, December 2004. Available at SSRN: https://ssrn.com/abstract=622421

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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Randall K. Morck

National Bureau of Economic Research (NBER)

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University of Alberta - Department of Finance and Statistical Analysis ( email )

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Bernard Yin Yeung

National University of Singapore - Business School ( email )

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Kan Li

Independent

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