Summary Since partition, the economic strength of the north and the south have gone into reverse. The economy of the Republic is now four times larger than that of Northern Ireland, with industrial output ten times larger than that of Northern Ireland. In other words, a worker in the Republic is typically paid half as much again as someone working in Northern Ireland.
Information acquisition about firms; e. Basically, liquidity refers to the ease with which an asset in this case securities can be turned into cash. The liquidity role stands out clearly as the most significant among the numerous functions provided by the stock market.
In the words of Levine, without a liquid stock market, many profitable long term investment would not be undertaken because savers would be reluctant to tie up their investments for long periods of time. However, as shown by Levine and Bencivenga, Smith and Starrliquid stock markets reduces the downside risk and cost of investing in projects that do not pay off for a long time, thus making such investment attractive.
This is because with a liquid equity market, the initial investors do not lose access to their savings for the duration of the investment since they can quickly, cheaply and confidently sell their stake in the company.
Thus more liquid stock markets ease investment in long run, potentially more profitable projects thereby improving the allocation of capital and enhancing prospects for long The size and economic impact of growth Levine, Without efficiently run stock markets, investors have limited means to diversify their portfolios.
As a result, investors may avoid equity stakes because they are too risky. Hence, corporations may find it difficult to raise equity capital. However, with creation of stock markets, individuals can diversify firm-specific risks, thus making investment in firms more attractive Bakaert and Harvey, PaulDeverreux and Smith and Obstfeldgreater risk diversification can influence growth by shifting investment into higher-return projects.
Intuitively since high expected return projects also tend to be comparatively risky, better risk diversification through internationally integrated stock markets will foster investment in higher return projects. The resultant effect is a boost in the economy, leading to economic growth. Stock market development may also influence corporate control through the take-over mechanism.
The presumption is that, if management does not maximize firm value, another economic agent may take control of the firm, replace management and reap the gains from the efficient firm. Such consciousness which is likely to cause a company to be better managed may not doubt be transmitted into the wider macroeconomic management and consequently lead to economic development in the country.
Information Acquisition about Firms: In larger, more liquid markets, it will be easier for an investor who has gotten information to trade at posted prices.
This will enable the investor to make money before the information becomes widely available and price change. The ability to profit from information will stimulate investors to research and monitor firms.
Better information about firms improves resource allocation and spurs economic growth. By agglomerating savings, stock market provide long term capital to both the government and the private sector, thereby enabling them to embark on worthy projects which require large capital injections and enjoy some economies of scale.
Thus, stock markets that ease resource mobilization can boost economic efficiency and accelerate growth Levine and Zervos, Critics of Stock Market Development and Economic Growth A number of economists have suggested that the existence of stock market has little relevance to real economic activity.
Wai and Patrick argue that securities markets have generally not contributed positively to the economic development of those countries that created the markets.
In a similar vein, Calamati posits that securities markets increases economic fluctuations and therefore hinder economic growth. Arguing against the impact of stock market liquidity on economic growth, Bhide contends that stock market liquidity may negatively influence corporate governance because very liquid stock market may encourage investor myopia.
This is because, instant stock market liquidity i. Moreover, critics of stock market further argue that the actual operation of the take over mechanism in well functioning stock market may not influence corporate control.
As explained by Stightzoutsiders will be reluctant to takeover firms because they generally have worse information about firms than existing owners. Thus, the takeover threat will not be a useful mechanism for exerting control; stock market development, therefore will not importantly improve corporate control and thus growth.
Various empirical studies have been conducted to ascertain whether stock market development actually promotes economic growth. Atje and Jovanovic tested the hypothesis that the stock market has a positive impact on growth performance.
By studying a relatively large set of 40 countries in the period — 88, and focusing on the dynamics of market size, they find a strong positive relationship between stock market development and economic growth.
Beck and Levine in another study confirmed the significance of stock market development in the process of economic growth. By applying novel econometric procedures, they tested the independent impact of banks and stock markets on growth.
Their finding was that the expansion of banks and stock markets significantly affects growth. Furthermore, the results of a study carried out by Adjasi and Biekpewhich examined the effect of stock market development on economic growth in 14 African countries, revealed a positive relationship between both variables and indicated that stock market development played a significant role in growth only for moderately capitalized markets.
Particularly, empirical studies by Oke and Mokolu to examine whether stock market promotes economic growth in Nigeria confirm the existence of a positive relationship between stock market development and economic growth.
A similar study by Osinubi to examine the association between stock market development and growth performance in Nigeria reveal that a positive relationship existed between economic growth and measures of stock market development used.
Additionally, Ezeoha et al conducted a study to examine the nature of the relationship existing between stock market development and private investment growth in Nigeria.The economic effect of an all-island economy April This report considers the potential economic impact of Irish reunification, with particular consideration given to the likely effects of Brexit.
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