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Corporate Finance Essay

2590 words - 11 pages

coIn 1950, there were 49 countries with stock exchanges, 24 were in Europe and 14 in former British colonies such as the United States, Canada and Australia. Their usefulness was seen as limited to only the wealthier countries in which they resided. Developing countries had low levels of savings and limited means to attract foreign capital; stock markets played an insignificant role in their economic growth before the 1980s. Funding for economic capital came primarily from foreign aid, state-to-state from advanced industrial countries to developing economies during the 50’s and 60’s.
During the 1970s there was an increase in private bank long-term lending to foreign states that nearly ...view middle of the document...

From 1984 to 1995, Global equity markets experienced an explosive growth and emerging equity markets experienced an even more rapid growth, taking on an increasingly larger share of this global boom. Between 1980 and 2005, 58 countries started stock exchanges. Overall capitalization rose from $4.7 trillion to $15.2 trillion globally, the share of emerging markets jumped from less than 4 to 13 percent in this period. Trading activity in these markets surged considerably: the value of shares traded in emerging markets climbed from less than three per cent of the $1.6 trillion world total in 1985 to 17 per cent of the $9.6 trillion shares traded in all world’s exchanges in 1994.
Stock markets of developing countries became major sources of foreign capital flows to developing countries. For example, Ajit Singh in his “Financial Liberalization, Stock markets and Economic Development” cited international equity flows of the Economist's 38 emerging markets increased from $3.3 billion in 1986 to $61.2 billion in 1993. This particular capital flow was different from the previous 20 years by the increasing role of foreign portfolio flow versus bank financing. These funds poured into developing countries through several routes as external liberalization increased; country or regional funds, direct purchase of developing countries stocks by industrial country investors, listing of developing countries securities on industrial country markets.
Last fall, the collapse of Lehman Brothers and the ensuing stock market crash dragged down emerging markets: decoupling seemed dead. Now, pundits who recently mocked the hypothesis are starting to wonder aloud if there might after all be something to it. The IMF forecasts that advanced economies will contract 3.8 percent in 2009; emerging economies are expected to post 1.6 percent growth this year. And international investors are flocking to emerging markets, which have beat those in developed countries by nearly 50 percent in the past six months.
Yet, neither the synchronized turndown nor uneven rebound is sufficient to prove decoupling true or false. The term is amorphous, and perhaps best used as a Rorschach test for the proclivities and interests of its wielder. But the underlying concept has staying power. And certain aspects of the decoupling hypothesis are important to examine, to see what they portend for the future of the global economy.
First, there is a good deal of confusion about the distinction between cross-country synchronization of financial markets and economic activity. With capital and news flowing more freely and quickly across borders, stock markets around the world are increasingly synchronized. This makes it highly unlikely that we would observe a prolonged period of decoupling in financial markets.
Stock market indices are, of course, a good source of information about countries' overall economic prospects. But stock prices are more volatile than fundamental economic indicators: They react...

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