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Capital markets and capital allocation: Implications for economies in transition

Author

Listed:
  • Art Durnev
  • Kan Li
  • Randall Mørck
  • Bernard Yeung

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..

Suggested Citation

  • Art Durnev & Kan Li & Randall Mørck & Bernard Yeung, 2004. "Capital markets and capital allocation: Implications for economies in transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(4), pages 593-634, December.
  • Handle: RePEc:bla:etrans:v:12:y:2004:i:4:p:593-634
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    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • K2 - Law and Economics - - Regulation and Business Law
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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