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Equity Markets and Economic Development: What Do We Know

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  • Thomas Lagoarde-Segot
  • Brian M. Lucey

Abstract

The objective of this paper is to review the transmission mechanisms uniting equity market development and economic growth in developing countries. We find that the theoretical impact of equity markets is ambiguous. At the domestic level, the allocation function of equity markets appears conditioned by the extent of informational efficiency. Turning to international linkages, theoretical models suggest that equity market integration lowers the cost of capital, increases financial vulnerability and has a mixed impact on capital flows. Taking this into account, two conclusions arise. First, equity market development policies should focus on reaching and maintaining adequate levels of institutional transparency. Second, the optimal degree of international integration depends on the society’s preference between international accessibility and domestic stability.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp182.

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Date of creation: 16 Nov 2006
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Handle: RePEc:iis:dispap:iiisdp182

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Keywords: Equity Markets; Economic Development.;

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  1. Anusha Chari & Peter Blair Henry, 2004. "Risk Sharing and Asset Prices: Evidence from a Natural Experiment," Journal of Finance, American Finance Association, vol. 59(3), pages 1295-1324, 06.
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