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

Solomon A. Tadesse ()

No wp881, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

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 thirty-eight 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

Keywords: Corporate Governance; Information Aggregation; Monitoring; Economic Efficiency; Productivity; Economic Growth (search for similar items in EconPapers)
JEL-codes: G3 G34 G14 E44 O16 (search for similar items in EconPapers)
Date: Written 2003-03-01

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