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Institutional investors and securities markets : which comes first?

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  • Vittas, Dimitri
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    Abstract

    Institutional investors comprise pension funds, insurance companies, and mutual funds. Should a country promote their creation if it lacks well-developed securities markets? The answer to this question, says the author, varies by type of investor. He argues that private pension funds and insurance companies are promoted for their own sake and for their potential economic, fiscal, and financial benefits, whether or not a country already has well-developed securities markets. Mutual funds, by contrast, are unlikely to thrive without strong and well-regulated securities markets. A limited supply of financial instruments should not be a major obstacle to the creation of pension funds and insurance companies. Such institutions build up their financial resources gradually but steadily, giving reforming governments ample time to develop securities markets. More important than the prior development of securities markets is a strong and lasting political commitment to holistic reform: macroeconomic, fiscal, banking, and capital market reform, as well as pension and insurance reform. Institutional investors need to attain critical mass and to be supported by conducive regulations. The author reviews Anglo-American experience since the 1940s. This shows that institutional investors can serve as a countervailing force to commercial and investment banks, helping to stimulate financial innovation, modernize capital markets, enhance transparency and disclosure, strengthen corporate governance, and improve financial regulation.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2032.

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    Date of creation: 31 Dec 1998
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    Handle: RePEc:wbk:wbrwps:2032

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    Keywords: Financial Intermediation; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Infrastructure Finance; Non Bank Financial Institutions; Financial Intermediation; Infrastructure Finance; Infrastructure Finance; Non Bank Financial Institutions; Insurance&Risk Mitigation;

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    1. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
    2. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
    3. Hansen, Robert S & Torregrosa, Paul, 1992. " Underwriter Compensation and Corporate Monitoring," Journal of Finance, American Finance Association, vol. 47(4), pages 1537-55, September.
    4. Hansen, Robert S & Pinkerton, John M, 1982. " Direct Equity Financing: A Resolution of a Paradox," Journal of Finance, American Finance Association, vol. 37(3), pages 651-65, June.
    5. Mark Carey S. & Stephen Prowse & John Rea & Gregory Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
    6. Helmut Reisen, 1997. "Liberalising Foreign Investments by Pension Funds: Positive and Normative Aspects," OECD Development Centre Working Papers 120, OECD Publishing.
    7. Salvador Valdés & Peter Diamond, . "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
    8. Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
    9. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    10. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-80, December.
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    Cited by:
    1. Independent Evaluation Group, 2006. "Pension Reform and the Development of Pension Systems : An Evaluation of World Bank Assistance," World Bank Publications, The World Bank, number 6956.
    2. Zsófia Ãrvai & Geoffrey Heenan, 2008. "A Framework for Developing Secondary Markets for Government Securities," IMF Working Papers 08/174, International Monetary Fund.
    3. Eduardo Siandra, 1999. "La inversión extranjera de los fondos de pensiones y el desarrollo del mercado de capitales doméstico," Documentos de Trabajo (working papers) 0599, Department of Economics - dECON.
    4. Stoyan Tenev & Chunlin Zhang & Loup Brefort, 2002. "Corporate Governance and Enterprise Reform in China : Building the Institutions of Modern Markets," World Bank Publications, The World Bank, number 15237.

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