The Allocation and Monitoring Role of Capital Markets: Theory
and International Evidence
Abstract: Capital markets perform two distinct functions: provision of capital and facilitation of
good governance through information production and monitoring. I argue that the
governance function has more impact on the efficiency with which resources are utilized
within the firm. Based on industry level data across thirty-eight countries, I present
evidence suggesting a positive relation between market-based governance and
improvements in industry efficiency. The measures of governance are also positively
correlated with productivity improvements and growth in real output. Furthermore, while
governance affects efficiency, the capital provision services induce technological change.
The evidence underscores the role of capital markets as a conduit of socially valuable
governance services as distinct from capital provision.
Keywords: Corporate Governance, Information Aggregation, Monitoring, Economic
Efficiency, Productivity, Economic Growth
JEL classifications : G3, G34, G14, E44, O16
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