Latin American Capital Markets

PRAGMATIC ISSUES IN CAPITAL MARKET DEVELOPMENT IN EMERGING ECONOMIES 493Policy IssuesLaw and EnforcementIt has become widely accepted that the development of capital markets in a particularjurisdiction requires the establishment of an appropriate legal and regulatory framework,the creation of a basic set of property rights, and an institutional legal and regulatoryregime in which these rights can be enforced. There are many areas of lawand regulation that need to be established to deliver all this, including those governingaccounting, bankruptcy and insolvency, collateral mechanisms, company formation,corporate governance, and disclosure.Little research has been done on the optimal sequencing path a countryshould follow to establish an appropriate legal and regulatory framework Black(2001) has identified a series of legal and institutional preconditions he believes criticalfor strong securities markets. Most importantly, he argues that a strong securitiesmarket must ensure that minority shareholders receive good information about thevalue of each company's businesses and also have confidence that company managersand controlling shareholders will not steal significant portions of the minority shareholders'investments.Black stresses that the institutions that support strong securities markets cannotbe built quickly. He identifies one area of particular importance as being the developmentof honest courts, regulators, and prosecutors. He also examines how bestto develop good capital market laws and rules. While it is possible to import thesefrom outside the country, it is vital that a country recognize that all the laws in all therelevant areas need to be consistent with each otherGood corporate governance is critical for the development of capital markets.An increasing body of both theoretical and empirical literature confirms the existenceof an economic relationship between investor protection and capital marketdevelopment La Porta and others (2002) summarize a key conclusion of this literatureas being that, without appropriate investor protection, 5Expropriation of minority shareholders and creditors by the controllingshareholders is pervasive. When outside investors finance5 See also Johnson (undated), who suggests that countries with more investor protection have better-developed financialmarkets and more growth and may also be less prone to economic collapse.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub