TAILIEUCHUNG - STOCK MARKETS IN LOW AND MIDDLE INCOME COUNTRIES

In every period, each population of investors receives its speci c endowment and risk sharing is implemented through trade of contracts which specify future transfers of endowments between the two populations of These contracts represent nancial securities which pay the speci c endowments as dividends. In the standard case where all investors can commit not to default on any prescribed endowment transfer, the optimal contracts achieve an e¢ cient risk-sharing allocation. If, however, one population of investors faces limited commitment in the sense that it cannot commit not to default, then e¢ cient risk sharing may be impeded as the optimal contract is constrained by the possibility of. | STOCK MARKETS IN LOW AND MIDDLE INCOME COUNTRIES Centre for Business Research University of Cambridge Working Paper No. 377 by Ajit Singh CERF Judge Business School and Centre for Business Research University of Cambridge Email December 2008 This working paper forms part of the CBR Research Programme on Corporate Governance. Abstract This paper explores the question of whether the institution of the stock market is likely to be helpful to low and middle income countries in promoting development of their real economy and ensuring fast industrial growth. The case for and against the stock market inevitably involves a discussion of the important related subjects of corporate finance corporate governance and corporate law. Contrary to the literature the paper arrives at a negative overall assessment of the institution of the stock market in relation to economic development. It also contributes by its policy proposals concerning the markets for corporate control which again are in conflict with much of the conventional wisdom on the subject. JEL Codes G1 G3 Keywords stock market market for corporate control corporate finance corporate governance corporate law. Acknowledgements This paper was originally presented at the Workshop on Debt Finance and Emerging Issues in Financial Integration 8-9 April 2008 United Nations Headquarters New York. The author is grateful to the Workshop participants and to Ann Zammit for helpful comments. The usual caveat applies. Further information about the Centre for Business Research can be found at the following address 1. Introduction Views about the usefulness and the relevance of the institution of the stock market to countries in general and to developing countries in particular have varied greatly over time. These assessments like share prices on the stock market itself tend to be quite volatile. At the time of the Great Depression of the 1930s the stock market had a bad press. It was .

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