The differentiation of 'emerging' equity markets

We argue that 'emerging' security markets, as defined by IFC, have characteristics differentiated from their counterparts in industrialized nations not only due to differential levels of economic development, but also because their origins are more recent. Consequently, the institutional infrastructure comprising a broad legal framework recognizing property rights, disclosure requirements, accounting practices conforming to international standards, supervision and regulation of these markets, may be inadequate or even absent in 'emerging' markets. Our study develops a positive (descriptive) framework of the qualitative (institutional infrastructure) and quantitative features that classifies and predicts the relative development of securities markets across countries. Discriminant and logit analyses using IFC data indicate that the 'emerging' equity markets as a class are dissimilar from 'developed' markets. These findings lend support to the premise that the two sets of markets are segmented. There is weak evidence of convergence in the characteristics of the two sets of markets. However, it is expected that as the institutional infrastructures in 'emerging' markets improve, there will be stronger evidence of the trend towards convergence in these markets.