Competition and stock market development

Previous research has found great disparity in growth rates of stock markets supporting the idea that the ranking in financial development is volatile. This paper analyzes the development of stock markets in the last decades and attempts to explain why countries change their ranking in financial development. For that purpose, I analyze 101 stock markets from 1975 to 2003. I find that the divergence is mainly explained by changes in law and regulation enhancing competition. In addition, the general level of competition is positively related with stock market development. Competition causes a decrease in the transaction costs and the cost of capital, driving more firms to list and more traders to trade. Results are consistent through time.