European Stock Markets and European Unification
BRUNO BIAIS
The goal of this chapter is to assess the current situation and the possible evolution of the European stock markets. What is and what could become their role in the European economy? How integrated are they currently and are they likely to be in the future? How do firms, investors, financial intermediaries and regulators intervene in the marketplace, and how are their respective roles likely to change?
In conducting this analysis we focus on the interaction between those issues and the European unification process. The latter includes European Monetary Union as well as the unification of regulation at the European level, or the interplay of political forces leading to or hindering European integration. We also try to build on recent theoretical, empirical and experimental work analysing the microstructure of markets, privatizations, corporate finance and investments, and rely on the insights it delivers, while omitting the technical aspects of these analyses.
The first section surveys the current situation of the European stock markets. The relative underdevelopment of Continental stock markets is documented and related to the financing and governance patterns of Continental European firms: the limitations of the financing and of the governance of firms by their outside shareholders are emphasized. It is also argued that the privatization wave as well as the reforms and improvements in the microstructure of the markets which have taken place over the last fifteen years have somewhat reduced the underdevelopment of European stock markets. Finally, empirical results documenting the significant home-country bias affecting the portfolio choices of European investors are reported. It is argued that this pattern is likely to be related to (1) regulatory constraints on portfolio choices, and (2) asymmetric information and agency costs related to investment in foreign shares.
The second section briefly investigates the likely short-term evolutions of European stock markets, in relation to European Monetary Union. It is argued that no radical alterations should be expected in the short term as regards such structural factors as corporate governance patterns or the asymmetric information costs associated with investments in foreign stocks. Yet regulatory restrictions on investments in foreign stocks could be alleviated (in particular if they were challenged at the European Court of justice), since the argument for 'investors' protection' (against foreign exchange risk) would no longer apply.
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