Does Shareholder Protection Promote Stock Market Development?
The paper uses recently created datasets measuring legal change over time in a sample of 21 countries to test whether the strengthening of shareholder rights in the course of the 1990s and 2000s promoted financial development in those countries. It considers three alternative dynamic panel data models. One is dynamic fixed effect model (DFE) that assumes that the sample of countries is identical in all respects excepting the initial condition. The other extreme is mean group model (MG) that assumes that the sample of countries is different in all respects requiring estimate of separate equation for each country and calculation of the mean of the estimates to get the over-all picture. The intermediate alternative is pooled mean group model (PMG) that assumes that the countries differ in terms of initial conditions (time-invariant factors), short-term relationships and the short-term adjustment processes but there exists an identical long-run relationship among the variables under consideration.
Although the finding of no relationship dominates across the alternative panel data models some clear conclusion emerges through the PMG model. It is observed that increasing shareholder protection leads to a declining number of listed firms (per million of population). That is to say there is no unequivocal support to the proposition that shareholder protection promotes stock market development. Rather the support is more towards the opposite proposition.
Keywords: corporate governance, shareholder protection, financial development, stock market development.
JEL Classifications: O16, G33, G34, K22, O16