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The untapped potential of alternative markets
Capital Markets Law Journal (2011)
  • Jose Miguel Mendoza, University of Oxford

Institutional fractures have in many ways undermined the plans of policymakers to strengthen stock markets in emerging nations. After more than a decade of legal reform, the countries that followed the prescriptions of the World Bank and the OECD have little to show for their efforts. If capital markets in developing jurisdictions are to reach maturity anytime soon, alternative avenues for growth must be sought. This paper suggests that the key to stock market development may lie with the same institutional frailties that set apart emerging countries from more prosperous nations. Where enforcement is feeble and the rule of law is lacking, reputation becomes essential for trading in product and capital markets. In this setting, the insiders of listed firms have powerful financial incentives to protect and expand their reputational capital. Specialized market tiers can harness these incentives within a system designed to regulate the behaviour of controlling shareholders. A development strategy of the kind suggested here could potentially assist in the expansion of capital markets and supplement long-term efforts for institutional reform in the emerging regions of the world.

  • Developing countries,
  • stock exchanges,
  • alternative markets,
  • corporate law,
  • reputation,
  • private benefits of control,
  • controlling shareholders,
  • enforcement,
  • signalling.
Publication Date
Citation Information
Capital Markets Law Journal (forthcoming)