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The Role of Capital Markets in Economic Growth

Catalyst Monograph Series, 1995.

Geert Bekaert
Stanford University, Stanford, California, USA 94305
National Bureau of Economic Research, Cambridge, Massachusetts, USA 02138

Márcio G. P. Garcia
Pontifical Catholic University, Rio de Janeiro, Brazil
National Council for Scientific and Technical Development (CNPq)

Campbell R. Harvey
Duke University, Durham, North Carolina, USA 27708
National Bureau of Economic Research, Cambridge, Massachusetts, USA 02138

Capital markets play an important role in the economic development of emerging capital markets. Well functioning markets ensure that both corporations and investors get or receive fair prices for their securities. This ensures that valuable projects will be financed and negative value projects will be rejected. Most importantly, we argue that integration into world capital markets will accelerate the growth process. A country that erects barriers to international participation will face a higher cost of capital. This discourages domestic investment and diminishes foreign direct investment. Our analysis indicates that Brazil's cost of equity capital could be lowered if an aggressive program is undertaken to increase the degree of integration in world capital markets.