Conclusion
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.
I examined two possible measures of stock market development – market capitalisation and ownership concentration of firms. In the 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. Other possible 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.
In relation to the second measure, the paper brings together updated data on the concentration of ownership of New Zealand firms. My analysis suggests that, contrary to McMillan’s concerns, the ownership concentration of New Zealand’s large publicly traded firms has become less concentrated between 1995 and 2006. In addition, a close look suggests that ownership in 1995 was not particularly concentrated by international standards.
There is little consensus among economists around the world about what the “optimal” regime of investor protection would look like. However, La Porta has produced some evidence that allows for comparisons across countries. A close look at these comparisons and recent changes since 2000 that may affect New Zealand’s relative standing indicates that New Zealand’s investor protection measures rate reasonably well in terms of private protection, although it has lagged some OECD countries in the area of public protection. However, it should be emphasised that these conclusions are based on fairly broad abstractions. There may be details that are important to get right in both public and private protection that are not apparent in this type of cross-country study. 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.
My analysis suggests further reforms to the regulatory settings around investor protection, beyond those measures already in progress, are unlikely to have a significant impact on the development of the New Zealand stock market. Further research and policy measures might usefully focus on other factors that could be constraining development of the stock market.
