Capital market functions and economic performance: International industry evidence

This dissertation examines the relationship between capital market functions and economic performance with a focus on the information production and monitoring role of markets. We view capital markets as performing two distinct functions: provision of risk capital and facilitation of good governance through information production and monitoring. We argue that these twin roles have distinguishable impacts on real firm performance. Specifically, while capital provision allows firms to acquire new technologies, thereby impacting on the rate of technological progress, the information production and monitoring function determines the efficiency with which resources are utilized within the firm. Using industry level data for ten manufacturing industries across thirty-eight countries, we find that capital market functions are indeed associated with industry performance measures. Measures of the information production and monitoring functions of markets are positively related to efficiency gains while measures of the capital mobilization function are positively related to the rate of technological progress. The evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision. In so doing, we attempt to shade light on the recurrent policy discussions on financial markets and institutions which traditionally focus solely on their capital mobilization role, and document the empirical content of the information and monitoring role of financial markets which pervade the corporate finance literature.