1. Law, finance, and growth

2. NES FF 2005/06 2 Questions How to measure country’s financial development? How to measure country’s financial development? How is it related to legal system? How is it related to legal system? How does it affect industrial growth? How does it affect industrial growth? What are typical financial systems? What are typical financial systems? How do they differ in vulnerability to crisis? How do they differ in vulnerability to crisis?

3. NES FF 2005/06 3 Financial development: stock market Size and liquidity of the domestic market Size and liquidity of the domestic market –Market equity cap to GDP –# instruments (actively) traded locally Stocks / bonds / derivatives Stocks / bonds / derivatives –# IPOs –Free float –Trading volume / turnover rate –Transaction costs / bid-ask spread

4. NES FF 2005/06 4 Financial development: stock market (2) Global integration Global integration –Share of foreign currency denominated obligations –# IPOs / trading volume abroad –Share of foreign investors in trading volume / ownership –Correlation (degree of co-integration) between Russian and foreign indices

5. NES FF 2005/06 5 Financial development: stock market (3) Returns and risks Returns and risks –Mean return / st.dev. / Sharpe coefficient –Synchronicity of individual stock prices Fraction of variation explained by market factors Fraction of variation explained by market factors –Sensitivity to domestic / global risk factors Oil price / currency / inflation Oil price / currency / inflation –Duration / credit rating / YTM of bonds –Default / term spread

6. NES FF 2005/06 6 Financial development: corporate sector Corporate governance Corporate governance –#/share companies with IAS reporting / open ownership structure / high (S&P) rating –Share of the largest owner / state –#/share of the independent directors –#/share transactions with the affiliated parties –Dividend yield / payout ratio –Control premium

7. NES FF 2005/06 7 Financial development: corporate sector (2) Financial policy Financial policy –Debt ratio (financial leverage) –Share of bank credits in debt –Share of foreign currency obligations in debt –Share of investments financed via external sources of capital –Duration of debt

8. NES FF 2005/06 8 Financial development: banking system Bank credits to GDP Bank credits to GDP # banks / large banks / foreign banks # banks / large banks / foreign banks –# new / cancelled licenses Concentration Concentration –Share of assets / deposits by top (5) banks Average # branches Average # branches Average credit / deposit rate / duration Average credit / deposit rate / duration Share of credits / deposits in foreign currency Share of credits / deposits in foreign currency

9. NES FF 2005/06 9 Finance vs growth: critique of cross-country studies Endogeneity Endogeneity Cross-correlation Cross-correlation –Regional effects Measurement error Measurement error Multicollinearity Multicollinearity

10. NES FF 2005/06 10 Finance vs growth: causality Omitted variables Omitted variables –Culture / propensity to save Anticipation Anticipation –Financial measures are forward-looking Solutions Solutions –Using instruments –From country to industry and firm level