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esults as regards the stability of the real economy. Both channels have been subject to a large and growing literature, sometimes producing controversial results. Integrated financial markets assume vital importance for several reasons. First, integrated markets serve as a conduit for authorities to transmit important price signals (Reddy, 2003). Second, efficient and integrated financial markets constitute an important vehicle for promoting domestic savings, investment and consequently economic growth (Mohan, 2005). Third, financial market integration fosters the necessary condition for a country’s financial sector to emerge as an international or a regional financial centre (Reddy, 2003). Fourth, financial market integration, by enhancing competition and efficiency of intermediaries in their operations and allocation of resources, contributes to financial stability (Tricht, 2005). Fifth, integrated markets lead to innovations and cost effective intermediation, thereby improving access to financial services for members of the public, institutions and companies alike (Giannetti et al., 2002). Sixth, integrated financial markets induce market discipline and informational efficiency. Seventh, market integration promotes the adoption of modern technology and payment systems to achieve cost effective financial intermediation services. 4.1 Empirical evidences about stock market Different studies have been carried out by financial economists on the implication of stock market development for various components of an economy. The growing importance of stock markets around the world has recently opened a new avenue of research into the relationship between financial development and economic growth, which focuses on the effects of stock market development. In this context, various stock market development indicators have been found to explain part of the variation of growth rates across countries (Atje andJovanovic1993; Levine and Zervos 1998). Some of the recent theoretical contributions by (Diamond 1984; Greenwood and Jovanovic 1990; Williamson 1986) suggest that stock markets may promote long-run growth and encourage specialization as well as acquisition and dissemination of information. (Greenwood and Smith 1997) suggested that, it may reduce the cost of mobilizing savings, thereby facilitating investment. Welldeveloped stock markets may enhance corporate control by mitigating the principal-agent problem through aligning the interests of managers and owners, in which case managers would strive to maximize firm value (Diamond and Verrecchia 1982; Jensen and Murphy 1990). As per the study done by (Demirguc-Kunt and Maksimovic 1996), on the stock market development and financing choice of firms using data from 30 developing and industrial countries from 1980 to 1991, it was investigated that the extent to which the variation in the aggregate debt-equity ratio within these can be explained by: (a) The level of development of the country’s financial markets (b) Macroeconomic factors (c) The differences between the tax treatment of debt and equity securities The study also reveals that in many developing countries with emerging stock markets, banks are fearful of stock market development because they think stock market will reduce the volume of their business. Instead, the results imply that initial improvements in the functioning of a developing stock market produce a higher debt equity allocation for firms and thus more business for banks. Levine and Zervos(1996) in their research “Stock Market development and long run growth” documented theoretical disagreement which exists about the importance of stock markets for economic growth. It gauged the robustness of the relationship between overall stock market development and economic growth changes in the conditioning information set and found a strong support correlation between overall stock market development and long run economic growth. 4.2: Stock Market Efficiency Rakesh Mohan (2007) stated that, Development, leading to greater integration of markets. Financial integration leads to reduction of speculative movements of funds that may occur due to arbitrage that market segmentation offers. In the process it ensures that intermediation is efficient and resource www.theinternationaljournal.org > RJEBS: Volume: 02, Number: 09, July-2013 Page 6
allocation is optimized. The chances of improving the effectiveness of polices are also enhanced as transmission mechanisms function more smoothly as market integration takes place. Compared to the stock markets in developed countries, the emerging stock markets are in many cases characterized by a lower volume and frequency of trading (‘thin trading’), ease of manipulation by a few large traders, weaker disclosure and accounting requirements, settlement delays, and a generally less than smooth transmission of financial information. If correct information on business performance and prospects fail to be quickly and fully reflected in the stock prices, those who have access to such information can benefit by anticipating the course of such prices. Such forecasting results in heavy buying or selling in the market, which makes the market inefficient. The primary requirement of the capital market is allocation of ownership of the economy’s capital stock. In general, the ideal situation in the markets exists when the prices provide accurate signals for resource allocation, i.e a market in which firms can make production and investment decisions, and investors can choose among the securities that represent ownership of firms’ activities under the assumption that security prices at any time fully reflect all available information. A market in which prices always fully reflect available information is called “efficient”. Therefore it can be concluded that efficient and developed financial markets can lead to increased economic growth by improving the efficiency of allocation and utilization of savings in the economy. The primary requirement of the capital market is allocation of ownership of the economy’s capital stock. The ideal situation of the market exists when the prices of different securities provide accurate signals for the investment decisions to the investors, who can choose such securities that represent ownership of firms’ activities under the assumption that security prices at any time fully reflect all available information. It is also found that, with the increased movement of investments across international boundaries owing to the integration of world economies, the understanding of efficiency of the emerging markets is also gaining greater importance. This directs to study further the importance of the market efficiency. 5: REFERENCES 1. Allen, F., Chakrabarti, R., & Shanker De’. (2007). India’s Financial System (http://fic.wharton.upenn.edu/fic/papers/07/0736.pdf) 2. Arestis, P., Demetriades, P, O., & Luintel K. B. (2001). Financial Development and Economic Growth: The Role of Stock Markets. Journal of money, Credit and Banking. Ohio State University Press, Vol 33, No1, PP 16-41, 3. Barry. C., B., John, W., Pea, W., III, & Rodriguez M. (1998). Performance Characteristics of Emerging Capital Markets. Financial Analysts Journal, Vol. 54, N0. 1, PP. 72-80 4. Chatoopadhyay, S., K., & Beherat S. R. Financial Integration of Indian Stock Markets. (www.igidr.ac.in/money/mfc_08/Financial_Integrationfor%20Indian%20Stock...%20Sadhan%20Kum ar.pdf) 5. Rangarajan, C. (1998). India’s Financial Markets changes and challenges, (http://www.iief.com/Research/tushar_chp1.pdf) 6. D Aruna Kumar, An Overview of Indian Financial System, (http://ww.indianmba.com/Faculty_Column/FC177/fc177.html) 7. Dr. Bhagwati, J. Towards Globalization of India’s Financial sector, (http://www.icrier.org/pdf/Financial%20Sector%20Issues%20Paper---%20%20Dr%20Bhagwati.pdf 8. Dr.Krishnan, K P. (2009). The Future of Financial Sector Reforms. Paper for the Conference on South Asian Financial Systems at a Crossroad: Promoting stability and growth (http://www.icrier.org/pdf/Session%201%20%20K%20P%20Krishnan-Paper.pdf)Ernst, E., & Escudero V. The effects of financial globalization on global imbalances. Department of Economics, Working Paper No. 0501,(http://nt2.fas.nus.edu.sg/ecs/pub/wp/wp0501.pdf) 9. Financial Market Integration (http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/77579.pdf) www.theinternationaljournal.org > RJEBS: Volume: 02, Number: 09, July-2013 Page 7
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