Legislación ecuatoriana

The study by Allen et al (2010) argues that financial development in Africa suffers from different underlying factors, in particular the case for the banking sector development. These factors are different from those influencing growth in the banking sector in other parts of the world. They provide evidence that there exists a financial gap in Africa, since the predicted levels of financial development exceed the actual levels experienced. The existence of a financial gap in the face of dominance of the banking sector in the past has resulted in new interests in the role of the stock market for African economies.

The shortage of resource mobilization, marginalization of African stock markets in the global financial capital, coupled with shrinking official aid are central to the tremendous financial gap facing the region. Understanding the key issues that matter most for the development of stock markets in Africa is a goal towards providing policy prescription that can help in filling the severe financial gap.

Stock markets have a multi-faceted role in stimulating growth in participating firms. In theory, stock markets can be used as a vehicle for capital mobilization and help also in providing key information on the firm growth prospects through compulsory information disclosure requirements for all listed firms. The stock exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

The stock market also helps to facilitate company growth through acquisitions or merger agreements. Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase market share or acquire other necessary business assets. By giving a wide spectrum of people a chance to buy shares and therefore become part owners (shareholders) of profitable enterprises, the stock market helps to reduce large income inequalities. Stock markets provide an extra source of income to small investors. It creates investment opportunities to small investors as individuals participating on stock exchange buy the number of shares they can afford as opposed to other businesses that require huge capital outlay.

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Government and local municipalities may raise capital for developmental projects by selling another category of securities known as bonds through the stock exchange to members of the public. When government gets this alternative source of funds, it no longer has the need to overtax people in order to finance developmental projects like huge infrastructure projects such as sewage and water treatment works.

Stock markets help investors by pooling and trading risk through accommodating investors with different wealth portfolios and trading firm shares of different industrial categories. Stock markets act as a vehicle by which domestic and foreign investors interact and thereby help in increasing global integration of financial markets in Africa. The risk on rate of return can be reduced by diversifying wealth portfolios through securities markets. Well-developed stock markets may enhance corporate control by mitigating the principal-agent problem through aligning the interests of managers and owners, in which case managers would strive to maximise firm value (Diamond and Verrecchia, 1982; Jensen and Murphy, 1990).

The stock market can also act as a barometer of the economy. At the stock exchange, share prices can rise and fall depending largely on the market information and reaction of investors to news and the general behaviour of market participants. Share prices tend to rise or remain stable when companies or the economy in general shows signs of stability. Therefore, the movement of share prices can be an indicator of general trend in economic activities.

While the potential effects of financial development on growth have been analysed extensively, in most models the degree of financial development is assumed to be exogenous (Pagano, 1993). The understanding of what determines the emergence of financial markets or the degree of their development is at least as important as assessing their effects on growth. Indeed, if financial markets do influence the growth outcomes, one would like to know what gets financial markets off the ground, especially what explains their relative development? On the other hand, relative size of these markets differ significantly even in countries that have reached a comparably high level of economic development, see evidence in Chapter 3.

The level of stock market development, in terms of size, liquidity, volatility and integration with world markets in the regions of emerging markets, that is, Asia, Latin America, Eastern

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Europe, Africa and the Middle East, are most likely to be different.35 The regulatory environments in which stock markets in these regions operate are different. This is why this research will use selected African capital markets as a basis to establish the determinants of stock market and banking sector development.

Many African stock markets in the past had little impact on overall economic performance (Jefferis, 1995, Hearn and Piesse, 2010). The exception to this is Johannesburg Stock Exchange which has been performing well. The goal of this research is to provide possible measures that might make these stock markets function better by understanding key aspects that characterize their development. We further argue that if foreign investor’s inflows were witnessed to be a source of fluctuations in macroeconomic activities in East Asia36; are the same mechanisms at work in African emerging and frontier stock markets? The main questions that this study seeks to answer are provided in the next section.

4.1.2. Research questions

The discussion in the introduction section of this chapter raises some interesting questions. Accordingly, this research seeks to answer the following questions:

I. What are the factors that matter for the development of African stock markets: size or liquidity?

II. What are the factors that matter for the development of banking sectors in Africa? Responses to these questions are meant to ascertain the determinants of emerging and frontier capital37 markets and banking sectors in Africa. Consequently, they will enable us to assess

35 _{Studies by Bekaert and Harvey (1997), Bonser-Neal and Dewenter (1999), Hearn and Piesse (2005) suggests}

the same views.

36

See Stiglitz, 2000, though Choe et al (1999) fails to find evidence on the destabilizing effect of foreign trades on the Korean stock market.

37 _{Frontier markets are very small and less developed markets as defined by International Financial Corporation}

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the degree of integration38 of local markets into global markets and their impact on stock markets’ liquidity and size.

4.1.3. Research objectives

Specifically, this chapter will establish determinants of stock markets and banking sectors’ development as well as establish the link between foreign investors’ participation, capital market liquidity and size for selected African capital markets. The chapter will:

I. Establish the influence of macroeconomic and institutional factors on stock market liquidity and size for selected African countries.

II. Investigate the determinants of the banking sector development for selected African countries.

The empirical evidence on the impact of macroeconomic environment and institutional quality on overall development of emerging and frontier capital markets in Africa has several policy implications for evaluation of viable investment resource allocation.

4.1.4. The study hypotheses

Consistent with the literature on other emerging countries39 and few individual country case studies in Africa40, this research hypothesize that:

I. Institutional and macroeconomic indicators do influence the stock market liquidity and size.

II. Remittances, institutional factors and macroeconomic indicators do influence banking sector development.

38

Financial market integration is defined as the degree of free access of foreigners to local capital markets (and access of local investors to foreign capital markets)

39

Errunza (2001)) finds no evidence about liberalization influencing stock market volatility, but it helps in fostering the evidence on stock market development. See also Khambata (2000), Levine (1996).

40 _{See Arowolo (1971), Jefferis (1995), Kenny and Moss (1998), Ngugi et al (2003), Marone (2003), Yartey}

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