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Law, finance, and growth

Law, finance, and growth. Questions. How to measure country’s financial development? How is it related to legal system? How does it affect industrial growth? What are typical financial systems? How do they differ in vulnerability to crisis?. Financial development: stock market.

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Law, finance, and growth

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  1. Law, finance, and growth

  2. Questions • How to measure country’s financial development? • How is it related to legal system? • How does it affect industrial growth? • What are typical financial systems? • How do they differ in vulnerability to crisis? FF 2005/06

  3. Financial development: stock market • Size and liquidity of the domestic market • Market equity cap to GDP • # instruments (actively) traded locally • Stocks / bonds / derivatives • # IPOs • Free float • Trading volume / turnover rate • Transaction costs / bid-ask spread FF 2005/06

  4. Financial development: stock market (2) • Global integration • Share of foreign currency denominated obligations • # IPOs / trading volume abroad • Share of foreign investors in trading volume / ownership • Correlation (degree of co-integration) between Russian and foreign indices FF 2005/06

  5. Financial development: stock market (3) • Returns and risks • Mean return / st.dev. / Sharpe coefficient • Synchronicity of individual stock prices • Fraction of variation explained by market factors • Sensitivity to domestic / global risk factors • Oil price / currency / inflation • Duration / credit rating / YTM of bonds • Default / term spread FF 2005/06

  6. Financial development: corporate sector • Corporate governance • #/share companies with IAS reporting / open ownership structure / high (S&P) rating • Share of the largest owner / state • #/share of the independent directors • #/share transactions with the affiliated parties • Dividend yield / payout ratio • Control premium FF 2005/06

  7. Financial development: corporate sector (2) • Financial policy • Debt ratio (financial leverage) • Share of bank credits in debt • Share of foreign currency obligations in debt • Share of investments financed via external sources of capital • Duration of debt FF 2005/06

  8. Financial development: banking system • Bank credits to GDP • # banks / large banks / foreign banks • # new / cancelled licenses • Concentration • Share of assets / deposits by top (5) banks • Average # branches • Average credit / deposit rate / duration • Share of credits / deposits in foreign currency FF 2005/06

  9. Finance vs growth: critique of cross-country studies • Endogeneity • Cross-correlation • Regional effects • Measurement error • Multicollinearity FF 2005/06

  10. Finance vs growth: causality • Omitted variables • Culture / propensity to save • Anticipation • Financial measures are forward-looking • Solutions • Using instruments • From country to industry and firm level FF 2005/06

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