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Stock Market Development and Economic Growth: A Matter of Information Dynamics

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Author Info
Salvatore Capasso () (Università di Napoli "Parthenope" and CSEF)

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Abstract

The aim of this paper is to provide further insights into the linkages between stock market development and economic growth. When it is not possible to distinguish between investment projects with different rates of return, market valuation of those projects is an “average value” reflecting the expected return across all investment opportunities. Consequently, as in a typical lemon’s market, higher return projects are penalised since they attract lower than fair prices. This informational cost, or dilution cost, depends on the degree of informational asymmetry in the market, as well as on the type of financial contract issued by the firm to finance those projects – typically, equity or debt. On this basis, we interpret the development of stock market as the result of a change in the level of informational costs which decrease with capital accumulation and induce firms to switch from debt financing to a less costly equity financing.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 166.

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Date of creation: 01 Sep 2006
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Handle: RePEc:sef:csefwp:166

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Related research
Keywords: Credit Markets; Economic Growth; Information Asymmetries; Stock Markets;

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Find related papers by JEL classification:
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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