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The Allocation and Monitoring Role of Capital Markets: Theory and International Evidence

Published online by Cambridge University Press:  06 April 2009

Solomon Tadesse
Solomon Tadesse
Affiliation:
tadesse@sc.edu, Moore School of Business, University of South Carolina, Columbia, SC 29208
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Abstract

Capital markets perform two distinct functions: provision of capital and facilitation of good governance through information production and monitoring. I argue that the governance function has more impact on the efficiency with which resources are utilized within the firm. Based on industry-level data across 38 countries, I present evidence suggesting a positive relation between market-based governance and improvements in industry efficiency. The measures of governance are also positively correlated with productivity improvements and growth in real output. Furthermore, while governance affects efficiency, the capital provision services induce technological change. The evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 4 , December 2004 , pp. 701 - 730
Copyright
Copyright © School of Business Administration, University of Washington 2004

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