What conditions necessary to develop a stock market in an emerging economy?

Essay by beauty_sandylam August 2005

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(a) Dependable law and regulations

The existence of dependable laws and regulations, not only from the government but also from the enterprises themselves is a necessary conditions since these all the organizations to compete and cooperate with the oversea and worldwide companies.

(b) Resolution of policy risk

Investor confidence in reliable property right and stable, market-oriented policies are a necessary condition for financial integration and the development of emerging stock markets. Announced market-oriented policies may be reversed, however, and are initially not fully credible. We argue that sustained privatization and liberalization programmes represent a major test of political commitment to safer private property rights, successful privatization has a significant effect on emerging stock market development through the resolution of policy risk, i.e. the risk of ex post policy changes with redistributive impact on investment returns. The evidence showed the progress in privatization gradually leads to increased confidence.

(c) Promoting healthy financial institutions

Healthy financial institutions especially banks, is a crucial prerequisite for financial stability.

The largest number of crises still arise, be it in emerging market economies or industrial countries, from financial institutions overextending themselves when times seem good and then retrenching violently afterwards. Governance would first benefit from a greater internal focus on risk-adjusted rates of return, particularly when rewarding traders and credit officers. The relentless pursuit of shareholder value, without this crucial adjustment, could prove a very dangerous strategy.

(d) Developing worldwide acceptable accounting and audit standard

It is recommended profession should be is self-regulated through accounting standard board instead of regulate by government, improve the credible of accounting and auditing report up to international accounting system (IAS) standards.