Does Shareholder Protection Matter for Stock Market Development and Corporate Capital Formation? A Case Study of India, 1976-2005

Abstract

The paper examines the relationship between shareholder protection, and stock market developments and corporate capital accumulation in India over a time span, 1976-2005. This study uses the time-series technique of cointegration and vector error correction modelling that takes into account the short-term relationship (temporary impact) and the stability of the adjustment process through which the short-term relationship (if any) culminates into a long-term relationship (permanent impact, if any). It examines both-way relationship-whether shareholder protection influences stock market development or changes in stock market scenario create an effective pressure on the law-makers to introduce legal changes or both. It concludes that India’s shareholder protection often dampens stock market and corporate capital accumulation which in turn often prompts government to tighten shareholder protection. It is also observed that increasing shareholder protection leads the corporate sector to move away from the issue of shares to debentures to finance corporate capital accumulation.