Summary
Some observers have expressed concern that New Zealand’s stock market appears to be underdeveloped relative to many other OECD countries. John McMillan (2004) has speculated that poor investor protection could be an underlying factor. The purpose of this paper is to evaluate evidence regarding the hypothesis put forward by McMillan about the potential link between weak investor protection and stock market development in New Zealand.
I examine two possible measures of stock market development – market capitalisation and ownership concentration of firms. In relation to the first, New Zealand does have a small market capitalisation by international standards. A range of factors could explain this outcome. The regulatory settings around investor protection are one, but only one possible cause. In relation to the second measure, I present updated data on the concentration of ownership of New Zealand firms. The data show that ownership is not particularly concentrated by international standards.
A set of widely-cited international comparisons, produced by La Porta (and various co-authors) in 2000, reckons that New Zealand has relatively strong private protection – that is, rules for disclosure of information, approval of transactions, and access by minority investors to redress in court. However, La Porta’s evidence suggests that New Zealand has lagged other OECD countries in the area of public protection – ie, the capacity of the Securities Commission and the courts to investigate wrongdoing and impose sanctions.
Since 2000 New Zealand has been moving toward stronger public protection and has been bolstering private protection mechanisms. New Zealand policymakers have also been working toward “harmonising” various slices of investor protection with emerging international standards. There is little empirical evidence about the optimal degree (let alone the optimal details) of private and public protection for stock market development. There may be details that it is important to get right in both private and public protection that are not apparent in the type of cross-country study produced by La Porta.
My conclusion is that the available evidence on investor protection and concentration of ownership tends to allay McMillan’s concerns that they have contributed to underdevelopment of the New Zealand stock market. It is therefore more plausible that other factors have constrained the development of New Zealand’s stock market. These factors include: low savings in the form of financial assets; the tax treatment of savings; trans-Tasman integration of capital markets; and the incidence of co-operative ownership and full or partial state ownership of New Zealand firms.
