Latin American Capital Markets

164 RUBEN LEEexecution to investors who want to trade small amounts, as well as to large traderswho are willing to wait for their orders to be executed gradually. Direct access by institutionalinvestors to the limit order books of electronic markets is becoming morewidespread. Dealer markets are increasingly confined to providing immediate executionto block traders who need protection against execution risk The lower tradingcosts also benefit issuing companies, since the reduction in trading costs is reflectedin higher issue prices for equities, and hence in a reduced cost of equity capital forpublic companies.This has induced more companies to go public, including new entrepreneurialcompanies. Pagano (1997) worries that the adverse effects of fragmentationand a lack of transparency might reduce these benefits to some extent Howevenhis concerns have been disputed. 3The Relationship between Financial Markets and GrowthThere is a growing body of academic work that shows a positive relationship betweenthe development of financial markets and growth, as discussed by the Committee ofWise Men (2000). To the extent that regional capital market integration furthersgrowth in financial markets, it may therefore spur economic growth.Levine (1997) studies the relationship between financial development andeconomic growth and concludes that most theoretical reasoning and empirical evidenceindicate that development of the financial system plays an important role in thegrowth process.This contrasts with the view that the financial system is essentially irrelevantto economic growth and industrialization. Levine also argues that there iseven evidence that the level of financial development is a good predictor of futurerates of economic growth, capital accumulation, and technological change. Moreovercross-country, case study, industry-level, and firm-level analyses document extensiveperiods when financial development (or lack of it) affects the speed and pattern ofeconomic development. Levine notes that theory suggests that financial instruments,markets, and institutions arise to mitigate the effects of information and transactioncosts. How well financial systems reduce information and transaction costs positivelyinfluences savings rates, investment decisions, technological innovation, and long-rungrowth rates.Levine, Loayza, and Beck (2000) evaluate the nature of the effect of financialintermediary development on economic growth. The econometric approaches they3 For discussions of fragmentation, see Cohen and others (1986, ch. 8), Lee (1999, ch. 13), Schwartz (1988, ch. 9),Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubSchwartz (1991), and U.S. SEC (1994).