توسعه بازار سهام ذیل جهانی شدن: منافع حاصل از اصلاحات بکدام سو می رود؟

Over the past decades, many countries have implemented significant reforms (including financial liberalization, privatization, and regulatory and supervisory improvements) to foster domestic capital market development. Despite these policies, the performance of capital markets in several countries has been disappointing. To understand the effects of reforms, we study the impact of six capital market reforms on domestic stock market development and internationalization. We find that reforms tend to be followed by increases in domestic market capitalization and trading. But reforms are also followed by an increase in the share of activity in international equity markets, with potential negative spillover effects.

Over the last two decades, a large number of countries, both developed and developing, have implemented significant capital market reforms, including stock market liberalization, improvements in securities clearance and settlements systems, and the development of regulatory and supervisory frameworks. These reforms, together with improved macroeconomic fundamentals and related reforms, such as the privatization of state-owned enterprises and the shift to privately managed defined contribution pension systems, were expected to foster domestic financial development.3 These expectations were supported by the growing cross-sectional empirical evidence on the determinants of stock market development, which shows that countries with sounder macroeconomic policies, better institutional environments, and more efficient legal systems, especially regarding the protection of minority investors, have more developed domestic markets.4 Capital market reforms were also expected to foster domestic market development through their impact on the stock market internationalization process. According to this argument, poor domestic environments prompt firms and investors to use international markets more intensively. A poor domestic environment has long been considered one of the main reasons for capital flight and greater use by domestic residents of financial services offered abroad (see, for example, Collier et al., 2000). Over the last decades, there has been an increasing migration of securities market activities to major international financial centers, such as New York and London. As part of this globalization process, depositary receipts (DRs) have become increasingly popular instruments.5 For many developing countries, activity in international markets now exceeds domestic stock market activity. A number of papers argue that this internationalization process is the result of firms trying to escape from poor domestic environments with weak institutions and poorly functioning markets.6 This view implies that capital market reforms will reduce incentives for firms to internationalize and will result in a lower share of equity market activities taking place abroad. This may have significant implications for domestic market development, as the migration of trading to international financial centers can have negative spillover effects on local markets.7 Despite the intense reform efforts, the performance of local capital markets in many developing countries has been disappointing. Although some countries experienced growth of their stock markets, this growth was not as significant as the one witnessed by the most advanced nations. Other countries experienced an actual deterioration of their domestic capital markets.8 Stock markets in many developing countries remain illiquid and segmented, with trading and capitalization concentrated on few stocks. The large number of policy initiatives and the dismal performance of capital markets have raised several questions. Is it possible that capital markets do not respond to reforms and that the policy prescriptions were based just on cross-country evidence? Is more time needed to see the full fruits of reforms? Does the reform agenda need to be rethought? In this paper we try to shed light into this issue, by analyzing how capital market-specific and related reforms have impacted both the development of domestic stock markets and the internationalization of stock market activities. We focus our analysis on six reforms that can potentially contribute to the development of stock markets, for which we were able to collect data on implementation dates for a large number of countries. These reforms are: stock market liberalization, enforcement of insider trading laws, introduction of electronic trading systems, privatization programs, structural pension reform (i.e., shifting from a public defined benefit pay-as-you-go system to a privately managed funded defined contribution system), and institutional reform.9 From an academic perspective, the value added of this paper is to analyze the impact of different capital market reforms using the same framework and extend the analysis beyond domestic stock markets, including activity in international markets. There are a number of papers that analyze the impact of some of these reforms on certain aspects of local stock markets. We discuss these papers below, when describing in detail each reform covered by our study. However, these papers tend focus only on one reform. We instead study the impact of six reforms on domestic markets, using two indicators of stock market development: capitalization and trading activity.10 Furthermore, none of these papers include international activity in their analyses. This represents an important limitation, given the significant participation of many countries in international equity markets. From an academic and policy perspective, our study allows policymakers to go beyond cross-country evidence and understand the within-country impact of reforms. Although the cross-country analysis of the determinants of stock market development is very informative, it presents some shortcomings from the standpoint of each country. The relevant policy question is how capital market reforms and improvements in the enabling environment will affect a country’s stock market. Cross-country evidence might not be very helpful in this respect, as some variables are completely exogenous and beyond the control of policymakers.11 And even when the government can manipulate some variables, it may be very difficult and might take a very long time for a developing country to replicate the environment existent in rich countries, which is the one thought to be optimal for finance to flourish. Even panel data analysis may be of limited assistance, as there may be little time variation in the macroeconomic and institutional environment and panel results might thus be driven by cross-country differences. In this paper, we shift the attention away from estimating the cross-sectional relation between fundamentals and stock market development, and focus instead on event studies, which show the within-country changes in stock market development and internationalization around capital market reforms. We view this approach as complementary to the panel and cross-country analysis documented so far in the literature. We find that reforms are associated with increases in domestic stock market capitalization and trading, contrary to the claim that they are not effective. However, we also find that reforms are associated with increased internationalization, and that some of the reforms seem to have been followed by a higher share of activity in international markets. This runs contrary to the view that a poor domestic environment prompts firms to access international markets and that reforms reduce internationalization. Most of the results are robust to controlling for domestic and international macroeconomic variables. These controls are important because capital market reforms can be contemporaneous to other policy changes (such as macroeconomic stabilization programs, trade liberalization, and the easing of exchange rate controls) or may occur at high points in the domestic and/or international business cycle. Since many countries implemented several capital market reforms in a short period of time, when analyzing each reform we also control for other reforms clustered around that time. We find that our results remain mostly unchanged when including this control, suggesting that the reforms under analysis tend to have a positive marginal effect on domestic stock market development and internationalization. The rest of the paper is structured as follows. Section 2 describes the data and the reforms under analysis. Section 3 presents the empirical results. Section 4 discusses some potential interpretation problems and presents robustness tests. Section 5 concludes.

In this paper, we analyze the impact of capital market-specific and related reforms on stock market development and internationalization. Our empirical analysis shows that these reforms are followed by increases in capitalization and trading in the local market. The evidence thus suggests that reforms are positively related to domestic stock market development, contrary to the claim that they are not effective and that the variation in panel data studies comes only from cross-country differences. However, we also find that internationalization increases after reforms, relative to both GDP and domestic market activity. This runs contrary to the view that a poor domestic environment prompts firms to access international markets and that reforms reduce incentives to migrate abroad. Rather, it supports the hypothesis that reforms make local firms more attractive, allowing them to access international markets. Our results come with some caveats. Reforms may be timed to coincide with high points in the domestic and/or international business cycles and with the implementation of other reforms. To address these issues, we control for domestic macroeconomic variables, US interest rates, and output growth in OECD countries. We find our results to be robust to the inclusion of these variables. However, these controls may not capture the full impact of other reforms and/or the business cycle. Also, some prior macroeconomic and institutional reforms may be necessary for capital market reforms to be successful. Furthermore, our reform dummies could be capturing the impact of some underlying trend driving the processes of stock market development and internationalization, not captured by the controls included in the regressions. Our robustness tests show that, when controlling for time effects in the regressions of domestic stock market development, some of the reform dummies remain statistically significant and positive, suggesting that capital market reforms are associated with increases in domestic stock market activity beyond any underlying trend. But accurately separating the impact of a common time trend from that of reforms would require longer time series of our dependent variables. Thus, more future research in this direction would be welcome. Our conclusions should thus remain tentative. But they do suggest that reforms do not result in a lower level of activity abroad and a concentration of stock market activity in the domestic market, as some arguments predict. Our findings also suggest that financial globalization could pose a significant challenge to policymakers, as their efforts to foster domestic stock market development seem to translate into more activity abroad. The migration of trading to international markets may adversely affect the liquidity of those firms that remain in the local market and their ability to raise new equity capital. This could have a significant impact on medium sized firms, which are not able to directly access international markets. The unexpected impact of reforms on internationalization calls for a revision of the reform agenda and related expectations. Further research is necessary to understand whether the impact of reforms differs across countries and regions and if differences in the timing of specific reforms affect their impact on stock market development and internationalization.30