Equity Markets and Economic Development: What Do We Know

Equity Markets and Economic Development: What Do We Know?

Thomas Lagoarde-Segot¹
Brian M. Lucey²

Abstract

The objective of this paper is to review the transmission mechanisms uniting equity market
development and economic growth in developing countries. We find that the theoretical
impact of equity markets is ambiguous. At the domestic level, the allocation function of
equity markets appears conditioned by the extent of informational efficiency. Turning to
international linkages, theoretical models suggest that equity market integration lowers the
cost of capital, increases financial vulnerability and has a mixed impact on capital flows.
Taking this into account, two conclusions arise. First, equity market development policies
should focus on reaching and maintaining adequate levels of institutional transparency.
Second, the optimal degree of international integration depends on the society’s preference
between international accessibility and domestic stability.

JEL classification: G11;G12;G15

Keywords: Equity Markets, Economic Development.

¹ Corresponding Author: [email protected]. Institute For International Integration Studies, School of Business,
Trinity College, Dublin & CEFI, Universite Aix Marseille II..

² PhD supervisor. School of Business Studies and Institute for International Integration Studies, Trinity College
Dublin.

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