Stock Markets, Corporate Finance, and Economic Growth

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;-iatch findings

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Stock markets, corporate finance, growth andeconomic
Emerging stock markets are booming, raising important questionsfor policymakers developing in countries
During the past decade the capitalization of emerging markets increased twentyfold, to about $2 trillion. In 1994 trading on these
markets accounted for about 17 percent of

their savings for long periods. Liquid stock markets ease this tension. In liquid markets savers hold an asset-equity that they can sell
quickly and cheaply. At the same time firms

GROWTH

OF

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the $9.6 trillion of shares traded on the world's stock markets, up from a mere 3 percent of the much smaller $1.6 trillion in 1985. This rapid growth in emerging stock market activity raises critical questions for
developing country policymakers. What

have permanent access to the capital raised through equity issues. By making long-run investments more attractive, liquid stock markets may boost investment in longer-run, more profitable activities, enhancing the
prospects for long-term economic growth.

MARKETS

OPPORTUNITIES

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effect do stock markets have on economic growth?How does stock market development affect firms' financing decisions?And if stock markets are good for growth, what policies can governmentsadopt to foster their development? This note summarizes answers to these questions drawn from a recent research project in the Finance and Private Sector Development Division of the PolicyResearch Department.

Do stockmarkets promote growth?
Theory is ambiguous about whether stock markets help or hurt economic growth. On the positive side, a liquid stock market may make it easier for firms to raise capital for investment. Many profitableactivitiesrequire a long-run commitment of capital. Yet investorsare reluctant to relinquish control of

On the... [continues]

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