Investor Protectionism and Financial Market Size

A common denominator of market-based financialminimize the integrity and size of the market as seen
system like that of United States and U.K andin the economies with dominant bank-based financial
bank-based financial system such as that of Germanysystems. Even in the efficient market-based systems
or France is investor protection. The United Stateswhere shareholders and creditors of the market are
has a market-based system because its economy isprotected well by laws, political trends and shift in
largely dependent on property and financial assetgovernment policy can inhibit the smooth running of
value. Consequently, it has a large stock and bondthese markets. There is the tendency for
markets creating a large market which attractsgovernments to garner more power and control in
investors and companies from all over the world. Thisterms of enforcement of the laws governing the
presupposes that the stock market and individualsmarket in times of deep economic recession.
(that is investors) play a significant critical role inA case in point is the financial market crash in 1929
corporate finance and governance as large fractionwhich was followed by the government expansion
of individual portfolios is held in the equity market.and ownership in the Great Depression. However,
Moreover, equity financing is practiced in this system.much as laws need to be enforced to ensure
On the other hand, bank-based systems areinvestor protection, an expansion of government
characterized by financial assets predominantly beingcontrol of the market can be very ambitious besides
held by financial institutions encompassing banks,reducing the efficiency of the market. That is why it
mutual funds, insurance companies, pension funds andis incumbent on the Federal government to critically
others. This means direct equity investment is smallexamine the amount of power and reforms it seeks
whilst individual investment is predominantly held into control the market to avoid a rippling effect of
bank deposits, insurance policies, mutual and pensionmarket inefficiencies. Most importantly the market
funds e.t.c. Debt financing comes mainly from banksinefficiencies would emanate mainly from competition
instead of stock markets and so the stock market isand capital gains impairment, no insulation from political
comparatively small and less significant in this type ofinfluence on investment and operating decisions. The
economic system. The fact is that, in market-basedmarket is a privatization entity and so should be
financial systems, investors property rights areallowed to operate with some level of independence
protected well due to the fact that stocks andfor efficiency and profitability. Reforms are necessary
bonds markets are significant and form a higherto ensure investor protection and subsequently
percentage of the GDP. For example in 2003, financialconfidence yet very robust reforms if not handled
assets was about 327% of GDP for U.S and 306%carefully can impact negatively the markets.
for U.K which are market-based dominant financialThese times are similar to the Great Depression
systems compared to 192% in Europe, 267% inperiod and care needs to be taken to avoid the
Japan which tends to be bank-based dominantdegenerating syndrome of "protectionism" as
systems, an epitome of socialist systems [1}.practiced in some socialist systems. We have learnt
The large stock market size in terms of number ofby observation and experience that the large size of
listed companies, aggregate market value relative tothe U.S market is also a result of large number of
GDP and initial public offering (IPO) relative toforeign individuals and company investments and any
population is a repercussion of the investorfailure of the market spills into the economies of the
confidence and the quality of laws governing therest of the world.
market. Contrarily, inadequate protection rights