International finance: issues related to law and financial development

Abstract

This dissertation examines three distinctive issues that concern the regulators and policy makers in the development of financial markets. It contains three stand-alone research projects within the context of law, finance and economic growth. Chapter 2 examines the dynamic relationship between banks and economic growth from the points of view of market efficiency and asset pricing theory. Publicly traded banks are broadly representative of a country's banking sector, so that banking industry stock prices will broadly reflect the performance of a country's banking sector. Because previous research has established that the institutional framework, as well as the aggregate size, of the banking sector can significantly affect economic growth, this chapter investigates whether the stock returns on a country's banking sector contain information about future economic growth, and whether the specific country and institutional characteristics that affect the functioning of the banking system and market efficiency also influence this relationship. Using the data from 18 developed and 18 emerging markets, the chapter finds a significant and positive relationship between bank excess return and future economic growth in both the time-series and panel analyses. The chapter also finds that this positive relationship is significantly strengthened by the enforcement of insider trading law, by banking crises, by bank disclosure regulations and financial development, but is weakened by government ownership of banks. Chapter 3 investigates the role of bank idiosyncratic volatility in economic growth and systemic banking crises. Using the same dataset from Chapter 2, this chapter finds an ambiguous relationship between bank volatility and economic growth in the time-series studies, which suggests that the effect of bank volatility on economic growth is more country-specific. In the panel analyses, the chapter finds a negative but very weak relationship between bank volatility and future economic growth. This negative relationship is ...