Developed stock markets: causes and consequences

Rossi, Stefano (2005) Developed stock markets: causes and consequences. Doctoral thesis, University of London: London Business School.

Abstract

This thesis consists of three chapters examining causes and consequences of developed stock markets. Chapter 2 is the first study of long-run evolution of investor protection, equity financing and corporate ownership in the U. K. over the 20th century. It finds that formal regulation only emerged in the second half of the century. The Chapter assesses its influence on finance and ownership by comparing evolution of firms incorporating at different stages of the century. Regulation had little impact on equity issues or dispersion of ownership: even in the absence of regulation, there was a large amount of both, primarily associated with mergers. The main effect of regulation was on share trading and the market for corporate control. Financial development in the UK relied more on informal relations of trust than on formal systems of regulation. Evidence includes geographical proximity of shareholders to their boards of directors, absence of price discrimination in takeovers and retention of directors of targets in merged firms. Chapter 3 studies the determinants of mergers and acquisitions around the world by focusing on differences in laws and regulation across countries. Chapter 3 finds that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an allcash bid decreases with the level of shareholder protection in the acquirer country. In cross-border deals, targets are typically from countries with poorer investor protection than their acquirers' countries, suggesting that cross-border deals play a governance role by improving the degree of investor protection within target firms. Chapter 4 assesses empirically the implications of technological innovations, proxied by patent grants, for corporate financing, investment and stock returns. Chapter 4 shows that industry patents are associated with more firm-level equity issues and reduced leverage. Within industries, however, equity issuers are not patent recipients. Subsequently, equity issuers do not increase investment expenditures, dividends, or acquisitions, but hold the proceeds of equity issues in cash reserves. Finally, patent recipients earn high positive abnormal returns. These findings cast doubt on traditional views of innovations as signals of investment opportunities or reductions of information asymmetry. The findings suggest that technological innovations act as a catalyst for investor sentiment.