Stock market development in Transition economies: A review of difficulties faced and basic infrastructure needed

A well-functioning stock exchange is essential to the process of transition. Almost all transition economies have established formal stock markets, however, they are small in terms of capitalization, have little trading activity and are not well developed: For most of the exchanges, except for the Russian one, capitalization is around 2-10 billion US dollars.

The reasons why development of stock market in transition economies is difficult are:

  • Weak laws and regulations
  • Slow progress on private sector development
  • Limited supply of institutional investors
  • Macroeconomic uncertainty

Despite the efforts of reforming the economy most of the Stock Exchanges in the transition economies are not going to be significant as their shares are only around 5% of today’s global market capitalization. However, this does not mean that transition economies will not have access to the services and functions offered by the stock markets

Globalization increases cross-border trade in financial services, and creates harmonization in the rules for global raising and trading. On the other hand, Stronger technological links created the opportunity for any large corporation to be listed and raise capital in the market that offers the most available financing, lowest price and best liquidity.

Although transition economies can import stock market services there is a need to improve further the basic infrastructure for the financial sector such as:

  • Stronger legal rights for creditors and shareholders
  • Better and more information
  • Greater disclosure
  • Well-governed institutional investors and,
  • Supporting private and public institutions

Influenced by the EU, integration process is much faster in Central Europe and the Baltics. The ownership transformation process has been completed (privatization and post-privatization) and their financial laws are harmonized with those of the European union. However, it is very unlikely for those stock markets to remain independent, the most probable scenario is mergers with bigger European exchanges. The mergers will help to raise new financing and enhance further corporate governance.

International developments have rapid impact on the stock markets in the transition economies. Thus, stock exchanges should be analyzed within the framework of international developments. It should be considered, that international markets have changed significantly, became increasingly global with increases in cross-border capital flows.

Globalization promotes capital flows, cross border provision and entry of foreign financial institutions. International equity issuance has increased substantially with more to be concentrated in the top 5 markets (NY stock exchange, Nasdaq, Tokyo Stock Exchange, London Stock Exchange and Deutsche Boerse) accounting for about ¾ of global capitalization and trending. Also, increased cross-listing and use of depository receipts and other forms of international capital raising reflect the recognition among large corporations worldwide that larger stock markets offer more financing, lower capital costs, greater liquidity and better name recognition.

 

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