European Capital Markets with a Single Currency

By Jean Dermine; Pierre Hillion | Go to book overview
2. European regulation should enforce transparency and priority rules so as to create the appropriate incentives for price discovery and liquidity supply.
There are of course many other dimensions of European unification and competitiveness than the monetary and financial aspects. Yet we believe that the efficiency with which European stock markets will play their role will matter for Europe's chances to remain a major player in the next century.Finally, we would like to emphasize that the different aspects of financial markets are intertwined:
Liquid stock markets reduce transactions costs and attract investors, which in turn reduces the cost of capital for corporations, and thus spurs investment.
Active stock markets, where efficient block trading facilities exist, make it easier for large shareholders to play their monitoring role, which enhances the performance of corporations.17
Transparent stock markets are less prone to the asymmetric information and agency costs deterring investments in foreign stocks and thus preventing investors from reaping the gains of international diversification.

References

Adler, M. and B. Dumas ( 1983), "'International Portfolio Choice and Corporation Finance: A Synthesis'", Journal of Finance, 38: 925-84.

Benos, A. and M. Crouhy ( 1996), "'Changes in the Structure and Dynamics of European Securities Markets'", Financial Analysts Journal, 52: 37-50.

Biais, B., P. Hillion and C. Spatt ( 1997), 'Price Discovery and Learning during the Preopening Period in the Paris Bourse', working paper, Institut d'Economie Industrielle, Toulouse.

Board, J. and C. Suttcliffe ( 1995), 'The Effects of Trade Transparency in the London Stock Exchange: A Summary', LSE Financial Markets Group Special Paper no. 67.

Bonte-Friedheim ( 1997), "'Little Bulls'", Wall Street Journal Europe, 15( 68) May 12: pp. 1 and 8.

Brennan, M. and H. Cao ( 1996), 'International Portfolio Investment Flows', working paper, UCLA.

Cooper, I. and E. Kaplanis ( 1995), "'Home Bias in Equity Portfolios and the Cost of Capital for Multinational Firms'", Journal of Applied Corporate Finance, 8: 95-102.

Davydoff, D. ( 1997), 'Global Equity Issuance and Trading', communication at the 1997 NYSE conference in Cancun.

Flood, M., R. Huisman, K. Koedijk, R. Mahieu and A. Röell ( 1997), 'Post Trade Transparency in Multiple Dealers Financial Markets', working paper, Limburg Institute of Financial Economics.

Folkerts-Landau, D. and M. Goldstein ( 1994), 'International Capital Markets: Development, Prospects and Policy Issues', Washington, DC: IMF.

Foucault, T. and F. Palomino ( 1997), 'Large Shareholders', mimeo, Carnegie Mellon University.

____________________
17
Foucault and Palomino ( 1997) offer an interesting theoretical analysis of this point.

-261-

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