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

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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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  • Salvatore Capasso, 2006. "Stock Market Development and Economic Growth: A Matter of Information Dynamics," CSEF Working Papers 166, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:166
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    3. Stefan Petranov, 2018. "Capital Markets Union And The Prospect For Bulgaria," Yearbook of the Faculty of Economics and Business Administration, Sofia University, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria, vol. 16(1), pages 217-230, December.

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    More about this item

    Keywords

    Credit Markets; Economic Growth; Information Asymmetries; Stock Markets;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, 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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