Opaque Markets and Rapid Growth: the Superiority of Bank-Centered Financial Systems for Developing Nations

Abstract

This paper analyzes the relationship between private investment incentives and the speed at which information regarding investment becomes public. In a developed country context, public information plays a limited role in creating investment incentives. However, in an environment of rapid economic development, firms only have a strong incentive to invest if information only becomes public after a long lag. Thus, the public disclosure that is an integral part of effective stock markets inhibits investment in developing countries despite not being problematic in developed nations. On the other hand, bank-centered financial systems limit the amount of public information and are therefore better suited to developing countries.