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Institutional investors and securities markets : which comes first?

Author

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  • Vittas, Dimitri

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.

Suggested Citation

  • Vittas, Dimitri, 1998. "Institutional investors and securities markets : which comes first?," Policy Research Working Paper Series 2032, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2032
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    References listed on IDEAS

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    1. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
    2. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    3. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
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    6. Reisen, Helmut, 1997. "Liberalizing foreign investments by pension funds: Positive and normative aspects," World Development, Elsevier, vol. 25(7), pages 1173-1182, July.
    7. Salvador Valdés & Peter Diamond, "undated". "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. Mark S. Carey & Stephen D. Prowse & John Rea & Gregory F. Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
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    Citations

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    Cited by:

    1. 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.
    2. Robert Webb & Matthias Beck & Roddy McKinnon, 2003. "Problems and Limitations of Institutional Investor Participation in Corporate Governance," Corporate Governance: An International Review, Wiley Blackwell, vol. 11(1), pages 65-73, January.
    3. Zsófia Árvai & Geoffrey M Heenan, 2008. "A Framework for Developing Secondary Markets for Government Securities," IMF Working Papers 08/174, International Monetary Fund.
    4. 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, April.
    5. 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, April.
    6. Rabindra Nath Chakraborty, 1999. "Finanzkrise und der Aufbau der Alterssicherung: Das Beispiel Thailand," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 68(1), pages 36-50.

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