American Chamber of Commerce Outlook,
July 2, 2010
Tālis J. Putniņš, SSE Riga and BICEPS

• Two fundamental roles:
– Pool and transfer household savings to investment by firms
– Efficiently allocate capital to its most productive uses
• Banks are good; stock markets have advantages
– Allocation efficiency
– No collateral, high risk projects
– Diversification => larger pool
– Exit option for VC

Sources: World Federation of Exchanges, European Federation of Exchanges, World Bank, author’s calculations

Liquidity
AND
Information
AND
Shareholder protection
Cost of equity
Investment (market cap.) and econ. growth

• EU accession
• Securities law reform
• Incorporation into Nasdaq OMX group
• Move to INET trading platform
• Acquisition of electronic surveillance technology
• Provision of real-time market data
• First independent institutional equity research company in Baltics (Emerging Nordic Research)

• Liquidity
– Market makers (paid for by exchange or firms)
– Maker-taker pricing of liquidity
– Consolidation of Baltic and Nordic exchanges - a single market
– Trading in Euros
– Subsidized IPOs (liquidity externalities)
– Partial privatization

• Information
– Increased regulatory pressure on firms’ information disclosure (enforcement)
– Stock analysts
• Shareholder protection
– Active and visible enforcement
(public, and more favorable conditions for private)
– Cross-listing in developed markets

• Stock markets are important
• Market capitalization is the result, not cause of a functional market, i.e., privatization is not a complete plan for stock mkt. development
• Recommendation: simultaneously pursue strategies to improve:
– Liquidity
– Information availability
– Shareholder protection