Role Of Financial Development On Economic Growth

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

With more people investing in the stock market, more buying stocks “on margin” took place, which meant more money was lent out. Many businesses and banks decided to invest in the stock market also, but the problem was that banks were using their customer’s money, without the customers being aware of this, to invest in the stock market.

The overall development of an economy is a major factor that has significant impacts on the development of the economy's financial markets. Since well-functioning financial systems offer good and easily accessible information, they lower the costs of transaction. This in turn enhances resource allocation and strengthens economic growth. The financial services industry consists of various systems such as stock markets and banking systems that enhance growth and help in poverty reduction. However, commercial banks tend to dominate the financial system during low levels of economic development while stock markets become more active and effective during periods of high levels of economic development ("Financial Sector", n.d.). The other important systems in the financial services industry include sound macroeconomic policies, shareholder protection, and good legal systems.

Wall Street affects the U.S economy in many ways, but the most influential ones are wealth effect as people tend to spend more when their net income or valuable assets increase in value and this makes the consumers more confident and comfortable as they are willing to invest more money into the economy which is beneficial which can have positive when consumers are willing to spend and negative when people are not confident which lowers the GDP. Another way is that, during an expansion, markets use their stocks to raise capital, which can then be used to reinvest to have higher economic output and hire more employees which eventually leads to having a better GDP. However, there are criticisms of how Wall Street works. Some people think that it is a rigged market based many convictions and scandals that have occurred in the past. It can cause an economy to enter a recession as is proven in the Great Recession of 2008-09. Also, they always use taxpayers’ money to bail themselves out as proven in the

Markets are places which people come together to trade stuffs, and stock market is an exchange where investors come together to buy and sell shares of publicly-treaded companies. (“The Financial Importance of the US Stock Market”) It’s good for our society in a great many ways, but it also can be harmful since people’s desire of money are fully exhibited in stock market. The Great Crash, happened in 1929, was not the event of one day but a series of events stretched initially across the week from October 23 through October 31. (Klein 326) This crisis had seriously impacted the U.S. by losing nearly 90 percent of the value of the stock market at that time. (Bierman) However, different from other events happened in the history, both government and normal people tended to blame the speculators at that time and avoid further investigations of it, but is the cause

Consequently, the great depression was happened at that period. It is worth to mention that such cause is still occurring in recent crises.

The same actions that maximize stock prices also benefit society. Stock price maximization requires efficient, low-cost operations that produce high-quality goods and services at the lowest possible cost. Stock price maximization requires the development of products and services that consumers want and need, so the profit motive leads to new technology, to new products, and to new jobs. Also, stock price maximization necessitates efficient and courteous service, adequate stocks of merchandise, and well-located business establishments--factors that are all necessary to make sales, which are necessary for profits.

of economy. However, the existing literature is silent on the stock price dynamics and agency costs

The stock market plays an important role in the growth of the industry, plus in the business/marketing of the country that can eventually affect the economy of the country as a whole. This is important because all companies rely on the stock market as a primary source to raise funds. Till this day the government and region banks keep a close look at the ups and downs of the stock market. The stock market is only important to the people that invest in it, meaning they invest their money in real estates, mutual fund or money market funds, purchased bonds and/or purchased shares of a company (usually traded publicity or OTC). If one does not invest in the stock market anything that affects this economy situation does nothing to them.

When we invest money into the stock market we do it with the intention of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or ‘beat the market’. However, market efficiency - championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that security prices instantly and fully reflect all available information and that it would not be possible for an investor to make consistent excess profits. When new information

The stock market is one of the leading influences on price setting and trade markets. It can have both positive and negative effects on prices and movement in trade both domestically and internationally. The United States stock market has had a long history of influence not only on our economy, but also on a global scale. Currently, the stock market has been slight downturn, due to falling oil prices and agricultural commodities. Which allows for cheaper products for the consumers. It is clear to see that the stock market has and will continue to influence how the average person goes about their day to day life.

The theoretical framework on the effects of capital market on economic growth dates back to the work of Schumpeter, (1911) which explained that a well developed financial system can facilitate technological innovation and economic growth through the provision of financial services and resources to investors. The above argument of Schumpeter, (1911) was later advanced as the McKinnon-Shaw, (1973) hypothesis, which is a policy analysis tool for developing countries with strong recommendation and high priority on the efficiency of financial systems in facilitating capital accumulation and financial intermediation.

As known, ensuring price stability was the ultimate aim of the monetary policy by targeting an inflation rate or interest rate. Before the global financial crisis, most central banks took an expansionary approach to asset price and credit booms. As a result, monetary policy was to react to changes in asset prices and credit aggregates only to the extent that they affected inflation (Bernanke and Gertler, 2000). After the crisis, policy makers recognized the dangers associated with financial imbalances so that central banks tending to follow the flexibility. In many financial markets, considering about financial imbalances like foreign-exchange rate, interest rate, unemployment rate and fast credit growth becomes a more significant role on monetary policy. Meanwhile, there is no doubt that monetary policy has a direct effect on financial markets like stock market, bond market, mortgage market and so on. The aim of this article is to focus on the relationship between monetary policy and stock market movements. There is evidence that the stock returns is affected by the money supply rate. The link between the two parts is particular interest and the stock prices are sensitive to economic conditions. Therefore, the stock prices’ trend is able to become a reflect of the monetary policy’s influences on stock market. In total, one of the ways that monetary policy uses to stabilize the financial market is to adjust interest rate, which affects firm’s equity and the stock liquidity.

Limited research work exists on this area, like Booth et al (2001) studied 10 developing countries including Pakistan. However, this study was confined only to top 100 index companies. Second study by Shah and Hijazi (2004) was an improvement on the first one as it included all non-financial firms listed on KSE for the period 1997-2001. However, the second study too was basic in nature in terms of its use of pooled regression model avoiding the fixed effects and random effects models. The purpose of this study is to extend the work of Shah and Hijazi (2004) by extending the sample period i.e 2001-2006 and including more firms in sample as convenient random selection of samples, using relevant models of panel data and using more explanatory variables.

Through our discussion this past week, we pondered the role of institutions in investment and the subsequent resulting growth. I hypothesize that institutional quality, measured through economic freedom, influences three separate mechanisms that determine the level of investment and its efficiency in creating growth. First, institutional quality determines how markets allocate investment capital, favoring both less risky and higher returning projects. Countries with institutions more consistent with economic freedom have lower taxation rates and less chance of asset seizure, making them more attractive destinations for investment capital. Secondly, prospective investment capital is less likely to be used to pay bribes or be confiscated by the governments of more economically free countries. Thus, the capital is more likely to create growth rather than be allocated towards unproductive means. Lastly, countries with more economic freedom should observe higher rates of return due to increased worker productivity and lower regulatory costs, creating more economic growth and allowing for further investment. In sum, investment in more likely to be allocated to countries with better quality institutions, the investment capital is more likely to be used towards productive projects in those countries, and finally, the investment capital should produce higher returns, leading to more economic growth. This is particularly relevant in the