Essays on the impact of institutional development on capital markets

Pao Yue-kong Library Electronic Theses Database

Essays on the impact of institutional development on capital markets

 

Author: Wang, Wenjie Jacqueline
Title: Essays on the impact of institutional development on capital markets
Degree: Ph.D.
Year: 2008
Subject: Hong Kong Polytechnic University -- Dissertations.
Institutional economics.
Capital market.
Department: School of Accounting and Finance
Pages: ix, 146 leaves : ill. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2239605
URI: http://theses.lib.polyu.edu.hk/handle/200/2836
Abstract: This thesis examines the impact of institutional development on capital markets. The first part of the thesis focuses on the impact of accounting standards and reporting incentives on the information content of stock prices using a sample of 44 countries around the world over a 10-year period from 1995 through 2004. Following Morck, Yeung, and Yu (2000), we use stock market synchronicity as a proxy for the informativenss of stock prices. We find that the adoption of International Financial Reporting Standards or US GAPP per se is not related to the information content of stock prices. Better accounting standards are helpful only in countries with proper reporting incentives. In particular, we find a significantly negative relationship between stock price synchronicity and accounting standards in common-law countries, countries with better shareholder protection, and countries with effective legal enforcement. Our results are robust to alternative measures of both accounting standards and reporting incentives, to alternative sample periods, and to alternative sample countries. Our findings suggest that a well functioning capital market needs both high quality accounting standards and strong legal and enforcement mechanisms. The second part of the thesis examines the relationship between shareholder return and risk and investor protection in an international setting with a sample of 41 countries around the world over an 11-year period from 1994 through 2004. We include both internal and external governance mechanisms in our analysis which allows us to determine if internal mechanisms complement or substitute for external mechanisms. We first find a significant curvilinear relationship between shareholder return and the fraction of insider ownership. The curve slopes upward until closely-held ownership reaches approximately 35% to 50% and then slopes slightly downward, and the relationship is stronger in countries with better investor protection, suggesting that shareholder return is more responsive to the alignment of interest between insiders and outside investors in countries with better investor protection. Secondly, we find that shareholder return is also significantly positively related to external governance mechanisms, and a combination of both internal and external mechanisms. Furthermore, we find shareholder return is significantly positively related to economic growth, and economic growth is more helpful in countries with market-based (versus bank-based) financing infrastructure. Finally, we find a negative relationship between risk and governance mechanisms, suggesting that good governance not only enhances shareholder return but also reduces risk borne by investors.

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