Recent legislative changes in New Zealand

New Zealand continues to reform the details underpinning public and private protection measures

Meanwhile, New Zealand continues to reform public and private protection measures under the auspices of the legislative initiatives, focussing on the finer details, which it is important to get right. As outlined above, reforms to public protection measures have strengthened the power of the Securities Commission and the courts to investigate wrongdoing and impose sanctions. In relation to private protection, the Securities Markets and Institutions Bill of 2002 introduces a new set of “continuous disclosure” rules that raise the requirements for timely disclosure on the part of issuers and are in line with international best practice. In addition requirements for substantial security holder disclosure have been simplified and disclosure obligations for investment advisors and brokers have been enhanced.

However, there could be some questions around the capability of market players stemming from the small size of the New Zealand stock market. While New Zealand has a high “level” of disclosure there may still be issues around the quality of the disclosure and the experience and ability of investors to interpret the information and make judgements about the risks, taking into account their individual circumstances. This is being considered as part of the wider Review of Financial Products and Providers which is currently still underway.

Implications of the results for New Zealand

Stepping back from the details of the recent reforms, we can ask what these results mean for New Zealand. La Porta et al (2006) and Djankov and La Porta et al (2006) find that countries that have strong private protection mechanisms also tend to have well-developed stock markets, as measured by capitalisation (relative to GDP), concentration of ownership of public companies, and other variables. In contrast, they find that public protection is not strongly correlated with stock market development, although the rule-making power of the supervisor appears to be somewhat important for stock market development in a sub-sample of “rich” countries.

This appears to support a straightforward story with two parts. First, when rights are better protected, investors are willing to pay more for shares, recognising that more of the firm’s profit is likely to come back to them as dividends (rather than being appropriated by the controller or manager of the firm). Second, the cross-country findings suggest that private protections are more important and effective than public protection measures. It could be that private protection matters more in the absence of good public protection in under developed countries, in which case the “rich” country subset may be a more appropriate comparison for New Zealand than La Porta’s overall results[18].

To sum up, the La Porta data show New Zealand as an outlier that bucks this correlation. That is, New Zealand rates well in terms of the private protection measures that seem to matter for stock market development, but nevertheless has a seemingly underdeveloped stock market.