Stock Markets, Corporate Finance, and Economic Growth: An Overview

Abstract

The research presented here focuses on four issues. First, it constructs more measures or criteria of stock market development than any previous study. It compares liquidity, concentration, volatility, institutional development, and international integration across forty-four industrial and developing countries from 1976 to 1993. Besides identifying general characteristics of these measures and defining stock market development empirically, these data facilitate further research into the relationship between stock market development and financial intermediaries, corporate finance decisions, and economic growth. These measures, ranked for each country, can be used for inter country comparisons of the level of stock market development. In addition, the data provide a basis for gauging the success of capital market development projects using objective criteria. Second, with these new data the research investigates the relationships between stock markets and financial intermediaries. Third, the research analyzes the relationship between stock market development and long-run economic growth. Fourth, the research studies the ties between stock market development and financing choices of firms. This overview puts this research in context and reviews the main results of the study. Section I provides a brief review of the role of stock markets in economic development and documents the evolution of debt and equity markets during the growth process. Section II defines stock market development and presents summary data on the development of financial intermediaries and stock markets. Section III presents evidence on the effect of stock market development on economic growth. Section IV summarizes the empirical results on how stock market development affects firm financing decisions. Section V concludes by discussing policy implications.