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Capital markets and capital allocation: Implications for economies in transition

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Author Info
Art Durnev
Kan Li
Randall Mørck
Bernard Yeung

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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. Copyright (c) The European Bank for Reconstruction and Development, 2004..

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Article provided by The European Bank for Reconstruction and Development in its journal The Economics of Transition.

Volume (Year): 12 (2004)
Issue (Month): 4 (December)
Pages: 593-634
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Handle: RePEc:bla:etrans:v:12:y:2004:i:4:p:593-634

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2008. "Formal versus informal finance : evidence from China," Policy Research Working Paper Series 4465, The World Bank. [Downloadable!]
  2. Bernard Yeung & Lubomir Litov & Kose John, 2004. "Corporate Governance and Managerial Risk Taking: Theory and Evidence Author-Name: Bernard Yeung," Working Papers 04-35, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  3. Hyunbae Chun & Jung-Wook Kim & Jason Lee & Randall Morck, 2004. "Patterns of Comovement: The Role of Information Technology in the U.S. Economy," NBER Working Papers 10937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Soultanaeva, Albina, 2008. "Impact of Political News on the Baltic State Stock Markets," UmeÃ¥ Economic Studies 735, Umeå University, Department of Economics. [Downloadable!]
  5. Joseph P.H. Fan & Randall Morck & Lixin Colin Xu & Bernard Yeung, 2007. "Institutions and Foreign Investment: China versus the World," NBER Working Papers 13435, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Simon Commander & Jan Svejnar, 2007. "Do Institutions, Ownership, Exporting and Competition Explain Firm Performance? Evidence from 26 Transition Countries," IZA Discussion Papers 2637, Institute for the Study of Labor (IZA). [Downloadable!]
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