Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development.
Financial globalization has also advanced in the last two decades with increased cross-border capital flows, tighter links among financial markets, and greater commercial presence of foreign financial firms in countries around the world. An important element of the globalization trend has been increased stock exchange activities taking place abroad, most notably for emerging markets, but also for developed countries.
Many firms now cross-list on international exchanges, with depositary receipts being a popular instrument to access international markets. Going forward, many expect these trends to continue as access to information improves, standards (concerning corporate governance, listing, and accounting) are more globally harmonized, technology advances, and inter-market linkages further increase.
In this paper, we try to shed new light on how economic fundamentals affect the processes of domestic stock market development and internationalization of stock exchanges activities. We start with a basic question: how do the macroeconomic and institutional factors that drive the development of local stock markets affect the internationalization process? Many papers have analyzed the factors influencing stock market development. More recently, some papers have also studied the factors driving internationalization.
However, papers have studied these processes separately, working with different methodologies and samples, what makes any comparison difficult. In this paper, we use the same framework to compare how economic fundamentals affect both the domestic stock market development and the internationalization of stock market activities (listing, capital raising, and trading abroad) for a large panel of countries and years.
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Stock Market Development and Internationalization: Do Economic Fundamentals Spur Both Similarly?
