1. Supply of Shares
The cost of financing is the main determinant of “going public” for a firm. According to the
“pecking order” theory of capital structure, internal financing should be the first choice of the firm, with debt being the
second choice. Debt is in second place as it is more
costly than internal financing
because of both the interest costs and the costs associated with issuing debt. Equity issuing comes
third among the choices available to the firm for financing as it is even more costly than debt. Generally, there are three main types of cost commonly associated with issuing shares. First, there is
the cost of distributing dividends to shareholders, which is generally done on a continuous basis, in
contrast to a debt contract (e.g. issuing bonds). Second, since equities are among the riskiest assets, investors will not hold shares unless the expected return is significantly higher compared to other
investment
alternatives. Third, equity issuance is more costly than debt due to the underwriting
commission and the cost of information (Chami et al, 2009). In short, issuing equity would be considered the last resort for financing a firm. Further, to raise capital in stock markets, companies
must
meet the listing requirements of stock exchanges for publicly
traded
companies as well as the financial reporting and control requirements imposed by securities market regulations. The
explicit
compliance cost of these
requirements is significantly high. More to the
point, raising capital in stock
markets has several costly
implications for corporate governance: i) decisions and
actions of the company’s managers become more visible as the company’s
financial data is disclosed through financial statements and other required filings; ii) another layer of management is imposed on the firm,
namely representatives of shareholders on the board of directors; and iii)
time and effort must be devoted by the firm
to
managing its relationship with shareholders. These requirements and responsibilities imply both a significant cost
and a certain loss
of control for
both owners and managers of the company (Chami et al, 2009).
Although firms may be the only source of issued shares, which might imply that the cost of financing could be the most significant or even the only determinant of the
supply of shares, in general, there are a number of macroeconomic
factors
that significantly affect the supply of shares and thereby the development of stock markets.
(i) Stage of
Economic Development
Broadly speaking, economic development is expected to
positively affect stock markets. Underdeveloped economies usually have a volatile investment environment, weak institutional and legal frameworks, poor governance, lack of transparency, and above all low levels of per capita income. All these factors impede
stock market development and at times even make
the establishment of a stock market superfluous
(Atkeson, Eisfeldt, Weill, 2017).
(ii) Size of the Economy
An economy large enough to support a stock market
is a necessary prerequisite for
the development of a stock market. Without a sufficient supply of shares, trading will be limited and the
market may not be economically viable. A small size economy most likely would not have a deep,
liquid stock market as such economies are usually characterized by price volatility. In addition, it may be that small economies do not have deep stock markets since
they lack efficiency of scale. Consequently, the amount of capital raised from issuance may be too small to attract potential issuers,
portfolio managers, or even a reasonable base of local investors to justify inclusion by leading
investment funds (Adelegan and Radzewicz-Back, 2009).
(iii) The Structure
of
the Economy
The structure of the economy – the relative proportion of shares representing the primary,
industrial and service sectors – is an influential determinant of stock market development. In addition,
whether the
industrial base
is
dominated by large
companies or dominated by small and medium-sized companies has significant implications for the supply of equity (Roc, 1996;
Brownless & Engle, 2016). Primary sector-driven
economies and/or economies with an industrial base dominated by small enterprises would most likely not have active
stock markets due
to the limited capital requirements of such enterprises. This in turn
makes it easier and cheaper for them
to
raise capital through banking finance, which ultimately limits the
supply of equity. However, economies with a large manufacturing base dominated by relatively large companies are more likely to have a sufficient supply of shares.
(iv) Prospects for Economic
Growth
The literature on initial public offerings (IPOs)
emphasizes
the importance of growth opportunities
in explaining capital-raising
behavior. Companies usually
increase investment and expand productive capacity to meet future expected demand for their products. Put differently, sustainable positive rates of economic growth lead to new markets as well as greater opportunities for companies to grow and make profits (Sudweeks, 1989; Ahn et. al., 2015). This serves as an inducement for companies
to obtain financing by raising equity to expand operations. Consequently, the supply of equity is more
likely to increase. In addition, a low number of listed companies induces speculative activity as the limited number
of shares
actually available for
trading is considered an “open invitation” to
speculators.
2 Demand for Shares
The demand for equity (investors) is the second building block of the stock market. Potential shareholders/investors have
preferences over risk-return combinations for the
funds they invest in –
some
prefer high risk-high return combinations, while others prefer low risk-low
return. In general,
these investors have three main concerns
(Acharya, et. al, 2017). First, since equity is one of the most risky investment alternatives, shareholders invariably expect a higher return. Second, shareholders need to monitor the
use of their funds and require a disclosure of information that enables them
to make sure that the
management runs the firm
in
a way that maximizes their returns on investments. Third, investors are
always keen to be able to liquidate their shares at
any point in time. Still, investors will be willing to
hold
shares with a higher expected return in a liquid and informative stock market.
From the macroeconomic point of view, there are a number of other factors that significantly
affect the demand for shares and, in turn, the development of stock markets.
(i) Economic Growth and a Sufficient Level of per capita GDP
Economic growth and per capita GDP are crucial –and strongly linked – determinants of stock
market development. Higher economic growth rates allow more people to invest in shares. A rise in per capita income increases an individual’s ability to save or invest. However, the increase in per capita income
should be considered with caution, for individuals will only invest after satisfying their
basic needs. That is to say that a sizeable per capita increase in income – if realized from a low base –
will be largely directed toward more consumption, and thus will not significantly increase investment, if it does so at all (Roc, 1996). In other words, it is not only the increase in per capita GDP that
matters, but also – and perhaps even to a greater extent - the level of the per capita GDP.
Greater individual financial wealth and
positive economic prospects bring
about changes in saving and investment habits as well as in risk-sharing behavior of individual households. In their search for higher returns, individuals may shift from deposits into bank accounts to investment in
shares. In this regard, Blackburn,
Bose, & Capasso (2005) argue that financial markets in less-developed countries are likely to remain small unless economic growth in these countries can catch up with the
rest of the
world. Calderon-Rossell
(1991) and Bopkin (2009) also concluded that “in general, economic progress in all regions, with a few exceptions, was the fundamental force behind stock market growth”. One might argue –keeping other factors constant– that there may be some sort of “multiplier” effect between economic growth and
stock market growth. That is, the
higher the
per capita GDP and the greater the wealth per capita, the
more investment there will be in stock markets, and the more liquid that market will be. Greater
liquidity will induce more
companies to list their shares because
of
the increase in price
per share. Ultimately, higher levels of investment and growth will be attained.
It is worth noting that income inequalities may weaken the link and the
possible multiplier effect between economic growth and stock market development. Put differently, the larger the share of
the population living at the subsistence level, the smaller will be
the percentage of the population economically able to participate in the stock market
(Roc, 1996). To account for the possibility of having a low per capita GDP base
along with income inequalities, the saving rate could be used as a reasonably good proxy for the
relationship between economic growth and per capita income and the
individual’s ability to invest in stock markets.
(ii) Investor Base and Institutional Investors
Stock market development requires a deep and diverse investor base. The lack of a diversified
investor base and heavy reliance on captive sources of funding are two of the main factors behind the shallowness and insufficient liquidity of stock markets. The investor base
should be diversified and
composed of institutional investors (e.g. mutual funds, pension funds and insurance companies) and
other financial institutions dealing in
different levels of risk
and
targeting different economic sectors. These institutional investors can play a crucial role in the
accumulation of funds and their channeling
into stock markets. Institutional investors are, in fact, usually
the
largest investors in stock markets in
developed economies.
In general, institutional investors can support the development of stock markets in various ways:
i) they enhance market
competition and act as a balancing influence in bank-dominated
financial systems and represent an alternative savings vehicle to banks for individual investors; ii)
institutional investors also help to address the problem of information asymmetry between company
management and individual
investors as they impose discipline on
company management via transactions in company stocks; iii) institutional investors may encourage more issuance of shares, which in itself increases the liquidity of the market; iv) a wide range of investors who differ in their risk preferences and
expectations
results in
rapid
price discovery from trading
and reduces vulnerability to shocks that would otherwise destabilize
the
market; and v) institutional investors also support the emergence of market makers, which
improves market liquidity (Iorgova and Ong, 2008). However, institutional investors should not be so large that they dwarf and dominate the market but large enough to take risks and position themselves advantageously.
The development of a diversified investor base is a complex process which is related to
fundamental
public policy issues such
as pension funds policy
(Árvai and Heenan, 2008). In
other words, generating significant changes in the composition of the investor base is critically dependent on
public policy decisions and
requires structural and fiscal changes as well as regulatory incentives and stock market development strategies, all of which are closely linked to the
state of development and sophistication of a country’s financial system.
(iii) Portfolio Capital Flows
Foreign participation in stock markets enhances domestic demand
for shares. In
addition, the
long-term
impact of foreign capital inflows on the development of stock markets is broader than the benefits from initial flows and increased investor participation, since foreign investment is usually
associated with institutional and regulatory reforms, adequate disclosure and listing requirements and fair
trading
practices.
Improvements in
informational and operational
efficiency
are expected to
inspire greater confidence in domestic markets (Errunza, 1983; Ahn, et. al, 2015).
Restrictions on foreign participation in stock markets may contribute
to insufficient depth and
liquidity in the market, particularly in the absence of a strong and diversified domestic investor base. However, the mode and the sequencing of the entry of foreign investors has to be carefully considered, as experience has shown that there
is
considerable
risk associated with participation by non-residents,
who
have access to alternative investments and thus may manifest more volatile demand.
Finally, over and above these determinants, there are two further economic factors that affect
both demand for and supply of shares: the extent
of development of the banking sector and an operating bond market.
3 Institutional Factors
Institutional factors represent the first supporting block of stock market development. These
include a wide range of factors such as regulations
affecting public issuers of securities,
market intermediaries,
asset
management,
supervision
and enforcement tools, trading payments and
settlement systems and corporate governance and transparency. An adequate institutional framework
is
expected to have a significant positive impact on the development of a stock market. On the one hand, investors will feel more confident regarding property rights and information transparency, which
could
encourage them to
invest
in stock markets. On
the other
hand, by reducing
the cost of transactions and increasing market liquidity, equity would be a more attractive
source of financing for
firms.
“Institutions” is a term
which refers either to the set of rules and norms that shape the social,
political, and economic interactions among the members of a society or to organizational institutions such
as
political, economic, social and
educational bodies (North,2001). Good
institutions may
positively affect the development of stock markets through at least two channels. First, adequate
institutions augment economic growth
by enhancing market fundamentals, promoting
trust, and facilitating exchange. Second, better institutions means better protection of property rights, less
corruption and more
transparency, all of which foster investor confidence and ultimately increase the demand for securities (Billmeier and Massa, 2007).
With reference to stock market development, institutional factors may be grouped into three components: the legal and regulatory framework, market infrastructure and “other” factors. Yet, it is
always hard to draw definite lines between these three categories.
(i) Regulatory and
Legal Framework
An adequate regulatory framework is crucial to the development of stock markets. A strong and transparent regulatory
and legal framework needs to be developed
for public issuers of securities, market
intermediaries, asset management
products,
payment and settlement
processes
and transparency requirements. Regulations need to address asymmetries of information between issuers
and
investors, clients and
financial intermediaries and
between counterparties to transactions; and
should ensure smooth functioning of trading and clearing as well as settlement mechanisms that will
prevent market disruption and foster investor confidence (Carvajal and Elliott, 2007).
The
core of regulating public issuers is to
ensure full timely and accurate disclosure of
relevant information to investors so as to enable them to make informed decisions. Disclosure
obligations should be imposed on issuers both at the moment of authorization for public offering and on an ongoing basis. One of the main responsibilities of the
regulator is to ensure that mechanisms are
put in place
to ensure the
reliability of the
information provided by issuers. In this regard, adequate
corporate governance is needed to ensure effective accountability of management to shareholders.
(Claessens et al, 2007)
The main purpose
of
regulating market intermediaries is to ensure
that brokers, dealers, and financial analysts enter and exit the market without disruption, conduct their business with their clients with due care, and conduct fair trade
using stock markets. Tools for regulating intermediaries include
licensing requirements and market business conduct obligations (Carvajal and Elliott, 2007).
Regulation of asset management seeks to ensure professional management and adequate
disclosure of investments to the investors. In addition, stock market regulations should ensure the smooth functioning of the market by ensuring fair access to adequate price formation, by limiting the disruptive effects that the
failure
of
an intermediary could have
on the market, and by ensuring that
market participants settle their trading obligations in an orderly and timely manner. (Carvajal
and Elliott, 2007)
A distinction can be made
between the three essential elements of securities regulations: the
legal framework itself, supervision of the
legal framework and enforcement of relevant laws.
Supervision and enforcement are
tools used to assure compliance with the legal framework. Compliance refers to adherence
to laws, rules and regulations, while supervision aims to detect non-compliance
with laws and rules, and enforcement seeks to detect and punish non-compliance. Taken together, both supervision and enforcement seek to promote implementation of laws, rules and
regulations.
One important
aspect of the regulatory and legal framework is
establishing a supportive
infrastructure for contract enforcement and dispute resolution. This infrastructure has many features that collectively are
known as the “rule of law”. Rubio (2001) argues that there are
three
key features of the rule of law in financial markets. First, it includes both political and legal guarantees of
civil liberties and property rights. Second,
the rule of law presumes an efficient judicial system that cuts transaction
costs and
limits predatory
behavior. Third, it establishes legal security, meaning that
under this rule of law citizens can plan their future courses of action and execute these plans in a context of well-known rules that will not be changed arbitrarily
The International Finance Corporation (IFC) has introduced seven regulatory indicators to
assess regulatory frameworks of stock markets. These indicators address the following areas: whether companies listed in a stock
market publish price-earnings information,
accounting standards,
the quality of investor protection, whether the
country has a
securities and exchange commission or not,
restrictions on dividend repatriation by
foreign investors, restrictions on
capital repatriation
by foreign
investors and restrictions on domestic investment by foreigners.
Finally, it must be noted that excessive
regulation can supress
stock market development. In principle, stock markets should not be over-regulated in areas where free market forces should
prevalent and should not be under-regulated where a normal regulatory framework should be in place to support market confidence.
Shareholder Protection
The fact that shares are transferable obligations and represent contractual relationships makes
them highly sensitive to all aspects of the legal rights involving transactions. Investors need to be protected
against stock manipulation and
improper practices by insiders (e.g. management and major
shareholders). In addition, adequate standards of professional conduct by brokers, underwriters and accountants must be established to avoid excessive speculation caused by rumors circulating about the
market.
One of the key regulatory determinants of stock market
development is the
level of shareholder protection in publicly traded companies, as stipulated in laws regulating companies or
securities (Shleifer and Vishny, 1986). In other words, stock market development is more
likely in countries with strong shareholder protection because investors do not fear expropriation. By using
indicators of the
quality of shareholder protection, La Porta et al (1999, 2006) provide evidence of the
importance of rights protection for minority shareholders.
Corporate Governance and Transparency
In general, corporate governance refers to the structure, rules and institutions that determine the extent to which managers act in the
best interest of shareholders (Claessens et al, 2007). Corporate
governance entails the adoption and implementation of well-developed securities and bankruptcy laws, credible accounting
and auditing
standards, and enhanced regulation and
supervision as
well as
stronger enforcement of private contracts. Strong corporate
governance
and financial transparency are
critical for the development of stock markets due
to the fact that they enhance investor confidence and increase equity investment.
(ii) Market Infrastructure
The provision
of a robust financial infrastructure for trading,
clearing and settlement of transactions is generally considered to be a public good (IMF, 2003, 2017). The
absence of a sound and efficient market infrastructure linking the
counterparties in securities transactions makes the development of stock markets unlikely. An inefficient securities settlement structure is a fundamental
impediment to stock market development as it raises settlement and operator risk, increases transaction
costs, hinders price discovery and may restrict the
range of participants in the market (Árvai and Heenan, 2008). The government may play a crucial role in providing the infrastructure needed to facilitate
the flow of information along with the price
discovery process to support the development of stock markets that are
both competitive
and
efficient. There are various types of infrastructure
that governments need to build. These would include the following elements: a modern payment system
for clearing and settling securities transactions, retail payments and large value payments as well as a
physical infrastructure for the operation of primary and secondary markets.
Dealers and Brokers (Intermediaries)
One of the most important
elements
of the infrastructure
required
for
stock market
development is the existence of experienced “dealers”. The activities of dealers and brokers make
equity significantly more attractive to investors and companies as they facilitate the exchange of
shares.
Market conditions are critical in attracting dealers and brokers. Particularly, three conditions must be satisfied. First, both supply and demand for shares should be sufficiently large: a larger number of buyers and sellers means more opportunities for brokers and dealers to serve
as intermediaries and make profits. Second, stock market regulations and rules must be conducive to
trading.
Thirdly, an efficient trading mechanism must be in place, a mechanism that
supports a clearing and settlement system which reduces transaction costs (Chami et al., 2009).
Trading System
Stock markets can be differentiated by their trading systems. Trading systems vary in the way transactions are
handled, types of transactions made, types of information available
to
market participants, and the process of matching orders to sell and buy (Glen, 1994). Electronic trading
systems can increase liquidity
and improve efficiency
by reducing transaction costs and increasing information availability. Modern trading systems may also attract new pools of liquidity by providing affordable remote access to investors. Based on data from stock exchanges in 120 countries, Jain
(2005) finds that the introduction of electronic trading systems enhances liquidity and leads to a reduction in the cost of capital.
Credit-Rating Agencies (CRAs)
Credit-Rating Agencies (CRAs) can provide valuable information
to investors which enables
them to make informed investment decisions. However, CRAs need to be
credible, independent, and able to obtain information if they are
to function properly. Further, they also need to be
profitable;
otherwise, they will not survive (Árvai and Heenan, 2008). To earn profits, CRAs need enough deal
flow or they will have to charge high fees which will discourage companies from using CRA services.
(iii) Other Institutional Factors
Banking Sector
Development
The development
of the banking sector
has
a significant impact on the
development of a country’s stock market. At the
early stages of its creation, the banking sector can enhance stock market development and a complementary relationship exists as support services from the banking system contribute significantly to the development of the stock market. In addition, having an operating bond market is important for a developing stock market since it implies that the country has a “capital market culture” with supporting institutions, issuers with disclosure experience, and
investors with an understanding of what it means to invest in securities
(Allen, et. al, 2012).
Political Stability
Political instability negatively affects the development of stock markets. In countries with unsettled political conditions, there is little interest in investing in shares because equity is usually a
medium-to long-term form
of investment
(Sudweeks, 1989; Chava & Purnanandam, 2010). Political risks influence
equity investment in two main ways. First,
a fear of restrictions on the repatriation of funds and expropriation discourages investment. Second, political instability hampers economic growth because companies postpone investments and attempt to move critical activities to more stable countries, a move which in turn dampens equity investment attractiveness (Roc, 1996). Further, political instability encourages
alternative forms of savings.
So it can be seen that political instability affects stock markets through its direct impact on investors’ confidence as well as its indirect impact on economic performance.
Education and Public
Awareness
Poor understanding of issues on the
part
of the public discourages potential investors from participation in stock markets. Roc (1996) argues that the propensity to invest in shares rises with the level of education. That is, a higher level of education increases confidence in stock markets by
contributing to a higher level of knowledge concerning financial activities. Without an educated public which understands the
fundamental rules, benefits, and potential pitfalls of participating in financial
investment, stock markets may not be able to develop. Further, an educated population can increase the
number of available
professionals (e.g. financial analysts, accountants and regulatory analysts) necessary for the development of an institutional and regulatory framework.
Availability and Quality of Information
The availability
and quality
of information
is essential for building
investor confidence. Uncertainty resulting from limited or poor quality information may be a major disincentive
to investment in stock markets. Four main factors may contribute
to
insufficient and/or poor quality
information: i) lack of standards governing tight and effective financial disclosure requirements; ii) inadequate
or
inactive
accounting standards and lax auditing practices; iii) the absence
of
a competent
stock broking industry, which limits available research on stocks and markets; and
iv) the lack of competition between firms. When demand for equities outstrips supply, companies are
not
obliged to
provide extensive information in
order to
place their
shares (Roc, 1996).
However, Dickie and
Layman (1988) argue that inadequate financial information should not be overestimated as typical small investors usually are unable
to understand financial reports. Yet, adequate information is highly
required for institutional and other investors.
It is worth recalling that lack of confidence imposes a significant explicit cost on publicly
listed companies as they must offer high dividend rates in order to offer competitive
investments. To
meet the investor’s requirement for high returns, companies might have
high
payout ratio, which aggravates companies’ financial positions and further discourages them from issuing shares.
Family Businesses
The costs of going public are considerable to family businesses as they generally value control and privacy. In other words, family
businesses may
be wary of allowing
“outsiders”, or non-family
members into the management of the firm (Chami et al., 2009). The dominance of family businesses
on business community limits the supply of shares and consequently deters stock market development.
Finally, indigenous entrepreneurs
are
important
contributors
to
the development
of stock
markets
as there is a need for a continuous supply
of new companies coming
onto
the market
(Sudweeks, 1989).
4 Economic Policies
A stable
macroeconomic environment is
crucial for
the
development
of stock markets.
Rational and predictable macroeconomic policies enhance investors’ confidence in the market and
create an environment conducive
to investment decisions. In addition, corporate
profitability can be affected by changes in monetary, fiscal, and exchange rate policies.
(i) Monetary Policies
Prudent monetary policies can facilitate
stock market development. Rational management of monetary policies ensures greater confidence in the
stability
of the economy as
macroeconomic
volatility magnifies the asymmetric information problem (Sun, 2012). First, interest rates have a critical effect on
the
desirability of shares in an individual’s portfolio of assets. Investors are concerned with real
returns, not just nominal returns. Consequently, momentary policies should insure an attractive long-term yield for equities compared to other domestic and foreign investment alternatives. Negative real
interest rates force
investors to shift to other less risky assets or countries. That is to say, low and
predictable rates of inflation are
more likely to contribute
to stock market development. Both domestic
and foreign investors will be
unwilling to invest in a stock market in which high levels of inflation are expected (Yartey & Adjasi, 2007). Second, the stability of the short-term interest rate increases
investor confidence in long-term securities, including equities, and promotes maturity transformation
by financial intermediaries. Third, effective implementation of monetary policies ensures adequate liquidity
to market
makers
which may reduce
the volatility of stock
markets.
It is
also worth mentioning that attracting foreign portfolio investment requires rational exchange rate policies.
(ii) Fiscal/Taxation Policies
Taxation policies
have a great influence on
investor participation in stock markets since
investors are concerned with the after-tax real return on investment. Unequal taxation favoring other alternative forms of investment such as bank deposits would shift investor interest from investing in equities. In many countries, equities are subject to double and even triple taxation. First, there is taxation at the corporate level before the distribution of dividends. Second, there may be taxation at the individual level and if returns on equities are taxed, there may be triple taxation. (Sudweeks, 1989; Bao, Hou, & Zhang, 2016) Prudent corporate tax policies help to develop stock markets since high corporate taxation can
limit the after-tax profit available for dividends distribution, which may in turn negatively affect investors’ willingness to invest.
Tax policies not only affect investor participation in the market, but also affect the supply of equities. That is, tax incentives to going public could encourage companies to go public and thus increase the supply of equities.
(iii) Institutional Investors Policy
Institutional investors may play a determining role
in stock market development. Yet, this role
in
turn is significantly influenced by institutional investors’ policies. For instance, limiting the possible
range
of financial assets for mutual funds, pension funds, and insurance
companies to low-yield
government securities
or imposing a high percentage of government securities
could be a major deterrent to
stock
market development
(Sudweeks,
1989; Chen, et. al, 2017). A reasonable
and active level
of participation by institutional investors is of great importance
for a stock market. It is also important to
note that
a stock market
without
institutional
investors
is prone to greater risk from individual speculators. However, a balance between the
two goals is required. On the
one
hand, institutional investors must have a significant and active
presence in order for stock market development. On the
other hand, the interest of investors in mutual funds and pension funds (e.g. retirees) should be
protected from high-risk investments.
(iv) Foreign Participation Policy
There is consensus on the important role
played by foreign portfolio investment in stock markets. International asset pricing models suggest that the integration with world financial markets should lead to a reduction in
the
cost of capital (Stulz,
1999). Stock
market
liberalization increases
the
pool of capital
available to local companies and broadens the investor base, which could lead to increased liquidity. It could as well improve
the quantity and quality of information available to market participants. In
addition, the scrutiny of foreign investors and analysts may increase
transparency and promote the adoption of better corporate governance practices as well as reducing agency problems (Stulz, 1999
and Errunza, 2001).
Therefore, stock market liberalization is expected to lead to deeper and more
efficient stock markets.
Empirical research finds evidence of an increase
in share
prices as well as a reduction in the cost of capital at around the date of liberalization (Kim and Singal, 2000 and Edison and Warnock, 2003). Other studies find significant increases in
investment and
economic growth
following stock
market liberalization. In addition, Bekaert et al (2001) found that liberalization had a positive impact
on domestic trading listings. Bae et. al (2006) found that stock market liberalization improved the
information environment in emerging stock markets.
One of the important issues in foreign
portfolio
investment is that foreign investors need assurance
that they can repatriate their funds and profits. However, recipient countries are usually concerned about the outflow of local currency. To minimize the risk of such a problem, a number of
countries, such as Brazil, Greece, Korea, Malaysia and Thailand, make use of country funds. Country
funds have encouraged foreign investment and brought additional funds to the
market without the worries of traditional international portfolio investment. This move
has been considered an important intermediary step to internationalization of the market in many countries. In addition, foreign investors
have generally been favorable to these funds, which have often sold at high premiums to net asset value (Sudweeks, 1989; Atkeson, Eisfeldt, & Weill, 2017).
Finally, allowing or
requiring domestic companies to list internationally may provide an additional source of funds and help spread the investor base and improve the
pricing efficiency of the
company.
Though we found and
discussed those determinants of stock market development and operations, the
question will always remain; are they sufficient to lead stock markets
advancement and improvement?. The changing dynamics of stock market development
is difficult, complex and multi-faceted. It has been evidenced that the complexity
is an intrinsic property of the stock market ((Levy, Persky, & Solomon,
1995). In a market of homogeneous investors
(MHI) periodic booms and crashes in stock price are obtained. When there are two
types of investors (TTI) in the market, differing only in their memory
spans, we observe sharp irregular transitions between eras where one population
dominates the market to eras where the other population dominates. When the
number of investor subgroups is three, i.e three investor populations
(TIP) the market undergoes a dramatic qualitative change - it becomes complex.
This suggests an alternative to the widely accepted but empirically
questionable random walk hypothesis.
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