| The predominant explanations for financial market development rely on economic arguments, but these approaches are incomplete and ultimately unsatisfying in explaining differences across countries. This dissertation combines a statistical approach with the study of an important case to examine the influence of a variety of hypotheses on capital market development.; The research tests a variety of arguments and finds support for two significant hypotheses. First, transparency, the rule of law, regulatory autonomy, and corruption are significant determinants of a country's financial infrastructure. Second, these factors are more essential for the development of equity markets than either credit or bond markets.; Changes in these variables result in significant fluctuations in a firms' cost of capital in the debt, bond, and equity markets. The rule of law, followed closely by transparency, is the most important determinant of capital market development. Contrary to expectations, this research shows that regulatory independence and corruption are significantly less important.; The Brazil case reveals the causal process behind these variables' influence. It is not merely transparency, but disclosure, that is most important. The rule of law was most affected by efficiency, not complexity, independence, or judicial corruption. The empirical support for regulatory independence is less for the securities markets than for central banks. There are different origins for securities market autonomy; limited independence that gives autonomy from the central bank might be sufficient. Finally, although corruption's influence was less than expected, there was an important link between corruption, tax collection, industrial competition, and unilateral or self-regulating efforts to improve transparency.; Equities markets are more affected by my political variables then credit and bonds, with much of these differences explained by informal mechanisms in the credit markets, or fundamental differences in monitoring, control, and exit.; The introduction of the Brazilian Novo Mercado (New Market) proved fundamental in confirming my research hypotheses. The success of the Novo Mercado demonstrates the advantages and limitations of private sector regulation, yet public policies need to be congruent with macroeconomic conditions and the political reality of financial market reform. The experience and history of the Novo Mercado suggest that the most successful reforms might be either less ambitious or rely on private sector, and especially, two-track solutions. |
