Institutional and legal aspects of financial development in transition economies
This dissertation explores the impact of legal and institutional factors on the development of securities and banking markets in transition economies, and on flows of foreign direct investment into the same. Chapter 1 introduces the main questions the dissertation seeks to address and identifies the topic of each chapter. Chapter 2 presents the methodology, and focuses on the 1999 EBRD Legal Indicator Survey, which provided the data on securities and banking laws, and contract enforcement. It presents background information on the use of surveys in economics, and the economic rationale for attaching weights to the survey questions. Chapter 3 studies the impact of securities laws on several measures of securities market development, and finds that stricter regulation of financial disclosure and market intermediaries raise stock market capitalisation and turnover. The enforcement of disclosure and regulation of intermediaries drives this result. Chapter 4 studies the impact of banking law and its perceived enforcement upon banking development. It establishes that legal indices on information disclosure by banks, such as use of external auditors, and consolidated supervisory examinations of banks, raise private credit, and foreign bank entry. Fewer legal restrictions on foreign ownership of domestic banks are also associated with a more developed banking industry. Chapter 5 examines the relevance of the contract enforcement environment for flows of foreign direct investment, and establishes that foreign investors are attracted to locations, with a transparent legislative process and dissemination of new laws, and which protect litigants' rights of appeal and judicial review of government decisions. FDI is higher in countries with higher confidence in the courts to resolve disputes with the government, but not so in countries with higher confidence in the courts to resolve disputes with private parties. Finally, Chapter 6 summarises the main results, and offers policy implications and guidelines for future research.