Latin American Capital Markets

INSTITUTIONAL INVESTORS AND CAPITAL MARKET DEVELOPMENT 131vestors may demand easier cross-border trading and efficient clearance and settlementprocedures (Dowers, Gomez-Acebo, and Masci 2000). For example, in the EuropeanUnion, 20 to 30 clearing and settlement firms, with differing settlement cycles,impose high transaction costs on cross-border transactions. With a single currencyand increased cross-border trading, institutional investors are pressing for cheaper transaction costs through consolidation.The product innovations prompted by institutions can also have broader economicand social benefits. In the United States, pension funds' demand for long-term,low-risk, fixed-income securities contributed to the growth of mortgage-backed securitiesin the 1970s (Vittas 1996). Through securitization, the mortgage market attractedadditional capital and provided the benefits of risk pooling to mortgage issuers.In countries such as Mexico, where housing finance depends on governmentfunding and mandatory wage contributions to pension funds earmarked for housing,securitization can alleviate these pressures and contribute to the availability of mortgages(IMF 2001).Improved Corporate AccountabilityAs influential shareholders, institutional investors have the ability to monitor and exertpressure for improvements in corporate governance and the accountability of managers.Although shareholders may choose an exit option and simply sell their shares inresponse to an unfavorable event or corporate policy, they may also choose to remaininvested and voice their concerns by exercising greater control over companies inwhich they maintain a significant voting stake. Furthermore, through their economicpower in the markets, institutional investors encourage good corporate governance byinvesting in companies on that basis. Institutions may also use their influence to compelregulatory efforts to enhance issuer transparency and information disclosure, toprohibit abuses and misconduct, and to promote policies on behalf of shareholders.Factors Leading to the Development of a DomesticInstitutional Investor SectorAs intermediaries, institutional investors' growth is dependent on two variables: thedemand by individuals for institutional products and a sufficient supply of financial assetsin which institutions can invest. In the United States and other OECD countries,a number of factors have affected these variables, as shown in figure 5-3, leading tothe development of the institutional sector. Although taken alone, each of these fac-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub