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Czech Ones Premises: Are Regulations the Solution for Stock Markets in Transition?

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Czech Ones Premises: Are Regulations the Solution for Stock Markets in Transition? EDWARD P. STRINGHAM, Ph.D. Trinity College Hartford, CT Edward.Stringham_at_trincoll.edu – PowerPoint PPT presentation

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Title: Czech Ones Premises: Are Regulations the Solution for Stock Markets in Transition?


1
Czech Ones Premises Are Regulations the
Solution for Stock Markets in Transition?
  • EDWARD P. STRINGHAM, Ph.D.
  • Trinity College
  • Hartford, CT
  • Edward.Stringham_at_trincoll.edu

2
Motivation
  • Most people agree that stock markets are a good
    thing
  • But the question is What do we need to make sure
    we have them and have them work well?

3
If one listens to Treasury Secretary Paulson
4
If one listens to Treasury Secretary Paulson
All I need is 700,000,000,000!
5
Bailout controversy aside
  • Most people believe that government oversight is
    needed in some important way

6
What are the necessary prerequisites for stock
markets?
  • Research on this question is especially important
    for emerging markets that historically have not
    had equity markets at all

7
Studying the experience of stock markets in
emerging economies
  • After the end of communism, there was somewhat of
    a natural experiment where different countries
    simultaneously set up stock markets in different
    ways
  • Observing the evidence in the various countries
    enables us to see the results of the different
    approaches
  • Lessons from the transition period can help
    inform policy debates about nations looking to
    advance their markets today

8
Overview
  • Comparative analysis of two somewhat similar
    markets that of Czech Republic and Poland
  • Present the consensus views about the necessary
    conditions for the emergence of stock markets
  • Compare the legal and regulatory climates in the
    Czech Republic and Poland
  • Compare the stock market performance in the Czech
    Republic and Poland
  • Discuss the implications and lessons learned

9
After the fall of communism in 1989 optimism was
high
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11
  • 1992 the Czechs elected Vaclav Klaus whose
    training was in economics

12
  • In 1993 the Czechs created a private stock
    exchange
  • And listed nearly 2,000 newly privatized firms

13
Although the Czechs had more rapid reforms than
other countries instant transition to a
burgeoning stock market did not take place
14
Pirates of PragueFortune Magazine (December
1996)
15
Problem of tunneling
  • In many cases firm managers tunneled firm
    resources to their own personal accounts rather
    than maximizing the values of the shares
  • Johnson, S., La Porta, R., Lopez-de-Silanes, F.
    and Shleifer, A. (2000) Tunneling. American
    Economic Review 9022-27.

16
The Economist (September 12, 2002) describes the
consensus view on the Czech Republic
  • Many now blame the extreme liberal ideas of
    their architect of reform, Václav Klaus, who was
    prime minister in 1992-98. He believed that
    freeing markets was more urgent than establishing
    an institutional framework. But today most
    people believe that Mr. Klauss big bang created
    little economic growth, but a kleptocracy as bad
    as Russias.

17
A new consensus among economists?
  • Many new authors (Stiglitz, 1999 Coffee, 1999
    Frye, 2000 Mlcoch, 2000 Pistor, 2001 Black,
    2001 Glaeser, Johnson, and Shleifer 2001 Zhang,
    2006) challenge previous economists who argue
    that unregulated markets can sort themselves out
    (Benston ,1998 Manne, 1969 and Stigler1964)

18
Quarterly Journal of Economics (2001).
  • Harvard and MIT economists, Glaeser, Johnson, and
    Shleifer argue the theory that unregulated
    financial markets can function, crucially
    relies, among other assumptions, on the
    possibility of effective judicial enforcement of
    complicated contracts.

19
Quarterly Journal of Economics (2001).
  • Glaeser, Johnson, and Shleifer argue that when a
    judicial system is lacking, government should
    hire a highly motivated regulator to enforce the
    rules.

20
Theories
  • 1. The new consensus view is that most economies
    in transition (especially the Czech Republic)
    have been too hands off in their approach to
    regulation. Contra Stigler et al, regulation is
    actually beneficial

21
How did other markets in Central Europe compare?
22
Evidence
  • Glaeser et al (2001) provide the most systematic
    comparison of the stock markets in Poland and the
    Czech Republic
  • They count the legal rules and regulations in
    Poland and the Czech Republic and find that
    Poland has more
  • They then provide a quantitative assessment to
    assess the relative performance of the two stock
    markets

23
How do the Warsaw and Prague Stock Exchanges
Compare?
24
Table 1 Glaeser et als (2001888) Table on Stock
Market Size in Poland and the Czech Republic
25
Figure 1 Glaser et als (2001889) Table on
Number of Stocks in International Finance
Corporation Investable Index in Poland and the
Czech Republic
26
Figure 2 Glaeser et als (2001890) Figure on
Market Capitalization of Stocks in International
Finance Corporation Investable Index in Poland
and the Czech Republic
27
Glaeser et als Table on IPOs in Poland and the
Czech Republic
28
Glaeser et al (2001) conclude
  • The regulated Polish stock market grew faster,
    maintained greater liquidity, and has been a
    better source of capital for firms than the less
    regulated Czech market.

29
Questions
  • With evidence like this should economists stop
    calling for laissez faire policies for economies
    in transition?
  • Is there any additional research economists
    should do before the case is closed?

30
  • Saving Capitalism from the Capitalists (2004)
    is one of the most powerful defenses of the free
    market ever written. Bruce Bartlett National
    Review

31
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32
Questions
  • With evidence like this should economists stop
    calling for laissez faire policies for economies
    in transition?
  • Is there any additional research economists
    should do before the case is closed?

33
My research
  • Conducted research in seven visits to the Czech
    Republic in July 6-30, 2000, July 10-August 5,
    2001, July 14-August 2, 2003, April 19-27, 2005,
    July 19-31, 2006, July 4-14, 2007, and June
    29-July13, 2008.
  • Conducted three dozen formal interviews as well
    as dozens of informal interviews.
  • We interviewed brokers, fund managers, bankers,
    lawyers, academics, and government officials.
  • Gathered information from Czech companies,
    government agencies, and the financial press
  • Read hundreds of pages of Czech regulations

34
Preliminary summary of findings
  • I found the market to be quite different compared
    to the findings of the armchair research of
    Glaeser et al.
  • Looking at de jure rules and a select few
    statistics as in Glaser et al (2001) can create a
    misleading picture of the regulatory environment
    in Eastern Europe.
  • By bringing in evidence from various sources we
    hope to create a more accurate assessment of the
    Czech situation.

35
The evidence reconsidered
36
Table 1 Glaeser et als (2001888) Table on Stock
Market Size in Poland and the Czech Republic
37
What happened to all of these firms?
38
  • Current location of the RM-System
  • in the Millennium Plaza n Prague
  • In 1998 the RM-System listed nearly two thousand
    titles
  • 48 of trades in the Czech Republic took place
    in the RM System

39
Figure 1 Glaser et als (2001889) Table on
Number of Stocks in International Finance
Corporation Investable Index in Poland and the
Czech Republic
40
Figure 2 Glaeser et als (2001890) Figure on
Market Capitalization of Stocks in International
Finance Corporation Investable Index in Poland
and the Czech Republic
41
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42
Comparing market performance using an index
43
Morgan Stanley-Capital International Indices for
Poland Czech Republic
44
International Finance Corporation Global Indices
for Poland Czech Republic
45
Comparing total stock market capitalization per
capita in Poland and the Czech Republic
46
Number of Firms and Market Capitalization Per
Capita for firms listed on the Prague Stock
Exchange and Warsaw Stock Exchange
Sources Data are from Prague Stock Exchange and
Warsaw Stock Exchange converted into USD using
Oanda Corp. Historical Currency Averages
47
What about IPOs
48
Glaeser et als Table on IPOs in Poland and the
Czech Republic
49
The different meanings of IPOs
50
The different meanings of IPOs
  • In Poland they referred to IPOS as
  • 1 When a private firm raises capital by initially
    selling shares
  • 2 When government privatizes a firm on the stock
    market (a privatization IPO)

51
The different meanings of IPOs
  • In Poland they referred to IPOS as
  • 1 When a private firm raises capital by initially
    selling shares
  • 2 When government privatizes a firm on the stock
    market (a privatization IPO)
  • In Poland in the 1990s less than 15 percent of
    the IPO market involved private firms raising
    capital

52
Explaining the lack of IPO activity in the Czech
Republic
53
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54
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55
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56
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57
Value of Trades Per Year on RM System (CZK MN)
Sources Data are from RM-System Annual Reports
58
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59
Conclusions
  • Results of Czech Privatization were not perfect
    but
  • It got most industry into private hands.
  • Economic freedom is higher in the Czech Republic
    than in Poland
  • Stock market capitalization per capita is higher
    the Czech Republic than in Poland
  • Per capita income is higher in the Czech Republic
    than in Poland
  • 24,400 vs. 16,200

60
Conclusions
  • The Czechs could have done better but.
  • The evidence that more regulation would have
    improved matters is not there
  • A highly regulated Polish market has not
    outperformed an unregulated Czech stock market

61
Conclusions
  • The Czech market is not an example of a market
    that failed because it had no regulations
  • The Czech market seems hindered by too many
    regulations not too little

62
Conclusions
  • Like most all other cases where governments
    believe they need to plan and tightly regulate
    markets, the goals of Polish and Czech regulators
    far surpassed their achievements.
  • Economies desiring more stock market development
    might do better by looking elsewhere rather than
    government regulation.

63
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64
Czech Ones Premises Are Regulations the
Solution for Stock Markets in Transition?
  • EDWARD P. STRINGHAM, Ph.D.
  • Trinity College
  • Hartford, CT
  • Edward.Stringham_at_trincoll.edu

65
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66
Warsaw Stock Exchange
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