Showing papers on "Financial market published in 1973"

Money and capital in economic development

Abstract: This books presents a theory of economic development very different from the "stages of growth" hypothesis or strategies emphasizing foreign aid, trade, or regional association. Leaving these aside, the author breaks new ground by focusing on the use of domestic capital markets to stimulate economic performance. He suggests a "bootstrap" approach in which successful development would depend largely on policy choices made by national authorities in the developing countries themselves.Central to his theory is the freeing of domestic financial markets to allow interest rates to reflect the true scarcity of capital in a developing economy. His analysis leads to a critique of prevailing monetary theory and to a new view of the relation between money and physical capitala view with policy implications for governments striving to overcome the vicious circle of inflation and stagnation. Examining the performance of South Korea, Taiwan, Brazil, and other countries, the author suggests that their success or failure has depended primarily on steps taken in the monetary sector. He concludes that monetary reform should take precedence over other development measures, such as tariff and tax reform or the encouragement of foreign capital investment. In addition to challenging much of the conventional wisdom of development, the author's revision of accepted monetary theory may be relevant for mature economies that face monetary problems."

Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934

Abstract: The Securities Exchange Act of 1934 was one of the earliest and, some believe, one of the most successful laws enacted by the New Deal. The stock market crash in 1929 and the Great Depression provided the impetus for reform of the stock markets in the belief that weaknesses of the institutions and ineptitude and/or chicanery among brokers and bankers were partially responsible for the losses incurred by stockholders. Although many critics, reformers and congressmen wanted Congress to enact "blue skies" legislation that would require all securities sold and traded to be approved by the federal government, President Franklin Roosevelt preferred the concept of "disclosure" (see Francis Wheat (1967)). Rather than having the government approve or disapprove securities, corporations whose securities are publicly sold and traded are required to disclose a large amount of predominantly financial information to the Securities and Exchange Commission (SEC) who make these data available to the public. Indeed, the Securities Exchange Act is described in its title and usually referred to as a "disclosure statute." Although the financial community generally opposed this legislation and the preceding Securities Act of 1933,1 most brokers, investors and government officials probably would find it difficult to conceive of the successful operation of the stock markets without the Securities Acts. Yet the economic rationale for the regulation of the securities markets was not examined carefully before the legislation was passed (which is not surprising, given turbulent times) nor has it been since,2 even though the Securities Act of 1934 was extended in 1964 to include most corporations whose stock is publicly owned. Such an examination of one important part of the law-the financial disclosure requirements-is presented here. This analysis is particularly timely because the SEC appears to be shifting its emphasis towards increasing the disclosure requirements of almost all corporations whose stock is traded in the markets.3

Systematic Elements in the Linkage of National Stock Market Indices

Abstract: PpT HE purpose of this paper is to investigate the systematic covariation between stock prices in developed countries. Covariation may reflect causation or it may indicate similar reactions to external stimuli. Causal relationships may be lasting or temporary and may accordingly result in sustained periods or in rather brief periods of covariation. For example, developments in the Canadian stock market are continuously influenced by those in the United States stock market. An example of the second type of causal covariation is the relationship between Japanese and United States stock prices in mid-1970. Because of a decline in United States stock prices at this time and the liquidity needs of large institutional investors in the United States, it was necessary for these investors to reduce their holdings of foreign assets.1 The reduction of their investment in Japanese equities resulted in an outflow of capital from Japan and stimulated a decline in Japanese equity prices. For markets outside the United States, the introduction of the Interest Equalization Tax by the United States in mid-1963 is an example of an external development that caused similar responses in several stock markets. This measure caused many stock indices to decline, especially those in Japan and Canada. To the extent that stock prices reflect domestic economic conditions and conditions are similar across countries, stock prices will show systematic covariation that is a result of developments external to the national stock markets. Covariation between stock prices in different countries is of interest to individual investors who wish to allocate their investment portfolios so as to maximize the rates of return on their portfolios for a given risk. The return on stock consists of the dividend paid on the stock and the change in the price of the stock. For most stocks the price is more variable than the dividend so that price movements account for a larger part of the change in the rate of return. Thus investors seeking effective portfolio diversification wish to determine the countries whose stock prices move together, those whose stock prices move in opposite directions, and those whose stock price movements are unrelated to one another. Covariation between stock prices in different countries is of interest to the forecaster and policy maker because stock movements affect domestic consumption and investment expenditures. The wealth of consumers is affected by changes in stock prices and changes in wealth affect consumption decisions. The mechanism through which stock price changes affect investment decisions is more complex, but the influence of these changes may still be significant. An economist is frequently interested in establishing the extent to which financial markets are integrated or the extent to which developments in one market are reflected in the developments in a second market. Measures of financial integration are traditionally based on the dispersion of interest rates between markets, with a smaller dispersion measure corresponding to a higher degree of integration.2 This study concentrates exclusively on the covariation between equity prices as a measure of integration since aggregate information on dividend payments is not available for most countries. In an attempt to measure the extent of covariation between national stock markets and to isolate and identify the patterns of linkage Received for publication June 28, 1972. Revision accepted for publication January 12, 19,73. * The views expressed in this paper are those of the author and not necessarily those of the International Monetary Fund. 1Legal constraints on the share of a United States institution's portfolio that may be invested in foreign assets may also have influenced the repatriation of portfolio capital. 2See R. N. Cooper, Towards an International Capital Market?, Center Discussion Paper number 68, Economic Growth Center, Yale University, July 1969. The question of the integration of national stock markets is briefly raised but is not pursued because price earnings ratios are not available in many countries.

Imperfections in international financial markets: implications for risk premia and the cost of capital to firms

Abstract: THE EFFECTS OF DIVERSIFICATION on portfolio efficiency have been examined extensively over the past decade since the pioneering works of Markowitz [10], and later Sharpe [12] and Lintner [7]. The great majority of the empirical work has been limited to common stocks in the U.S. capital market. Recently papers have begun to appear examining the merits of diversifying across international boundaries ([1], [2], [4], [5], [6], [11]). The purpose of this paper is to examine several theoretical implications of such international diversification, with particular attention to the effects of imperfections in international financial markets on risk premia for capital assets, the cost of capital to firms, and the efficiency with which capital is allocated.

Corporate Financial Policy in Segmented Securities Markets

Abstract: The attempt to incorporate securities market imperfections other than proportional taxes within a mean-variance security valuation context has met with modest success. Lintner [5], however, has recently considered imperfections by the device of segmented markets. His paper has motivated the following taxonomy. Securities markets are defined as weakly segmented if some of the securities in at least one market are available to some investors but not to others, partially segmented if the sets containing both investors and available securities in each market are disjoint, and completely segmented if additionally the sets of firms in each market are disjoint. Segmented markets effectively relax the separation property of mean-variance equilibrium models (i.e., all investors, irrespective of differences in present wealth or preferences, divide their wealth between the same two mutual funds; one is risk-free and the other is the market portfolio of risky securities). This property unfortunately implies that each investor must hold a portion of every available risky security. This is empirically unrealistic, primarily due to restrictions on borrowing and shorting and scale economies in security analysis and brokerage. Moreover, even in the absence of these complications, ownership of nonmarketable assets, nonhomogeneous beliefs, or breakdown of the separation property due to tastes or nonnormality will motivate individuals to hold different risky portfolios. The device of segmented markets embodies in extreme form these obstacles to diversification and portfolio similarity.

Structure of the Financial System

Abstract: A book that aims at describing and analysing the financial system of any country must devote a great deal of its space to the working of the various financial institutions and financial markets, but these are not the whole of the financial system, and they are not even an essential part of it. Of course, no financial system can develop very far without the aid of specialised financial institutions and financial markets, but there are still primitive economies in which they play little or no part. The essential feature of any financial system consists of a number of financial inter-relationships between the persons and bodies that make up an economy, and the basic structure of a financial system has three features: (1) the extent of these financial inter-relationships, (2) the forms of the financial claims in which the inter-relationships are expressed and (3) the pattern of relationships between persons and bodies of different kinds, between independent ‘economic units’ as we shall term them in future. The form of social accounting statement which exposes the basic structure of a financial system is a national balance sheet, a specimen of which for the United Kingdom is shown in Table 1.1.

The portfolio behaviour of selected Canadian financial intermediaries : an econometric analysis

Abstract: THIS STUDY PRESENTS a quarterly econometric model of the financial sector of the Canadian economy for the period from 1954 to 1967. It is designed to provide some empirical evidence on the adjustment mechanism for the transmission of monetary policy. The model comprises four sectors, namely the chartered bank sector, the trust and mortgage loan companies, the life insurance companies, and a residual private sector. The asset sides of the balance sheets for each of these four sectors include individual demand equations for federal government treasury bills and bonds, municipal and provincial government securities, corporate securities, mortgages, and currency and chartered bank deposit liabilities. The supply equations for corporate securities and federal, provincial, and municipal bonds are exogenously determined. The remaining supply equations, including the deposit liabilities of the chartered banks and trust and mortgage loan companies, are endogenous to the model. The model does not include an endogenous real sector. In total, the model consists of 49 equations, 35 of which are estimated by simultaneous equation techniques, while 14 equations are indentities. The statistical results for the equations in the study, in general, tend to support the hypotheses advanced for the portfolio behaviour of the various financial intermediaries. Also, the many different values of the various coefficients for the Koyck type lagged dependent variables, within the equations of the model, suggest a significant and varied lag structure for the different asset categories. These results lend support to those who maintain the lags in monetary policy are long and varied. The structure of the model enables one to examine the impact of specific monetary policy instruments on the various financial markets and intermediaries. The results of the policy instrument experiments are presented in the form of impact multipliers. The policy instruments examined include open market operations and a change in the Bank Rate. To illustrate the results of the model, consider a $100 million open market sale of government bonds, and a corresponding reduction in high powered money. This amount represented approximately one per cent of the federal government bonds outstanding in 1966. The model indicates that as a result of this sale commercial banks reduce their holdings of government bonds by $271 million and their inventory of treasury bills by approximately $12 million. Correspondingly, the life insurance companies reduce their aggregate holdings of federal government bonds and treasury bills by $1 million, while trust and mortgage loan companies increase their aggregate holdings of these securities by $25 million and the private sector adds $357 million of these securities to their inventories. The sum of these changes, of course, equals the $100 million by which total government securities were increased initially. The large reduction in government bonds in the chartered bank sector is accounted for, in part, by a decrease in their deposit liabilities of approximately $143 million. Consequently, the model suggests that the major initial impact of a federal