An economist has listed efficient saving mobilisation, capital allocation, information gathering, as well as exerting good corporate governance as some of the best options for the capital market to spur growth in the country.
Dr. Kingsley Obiora of the office of the chief economic adviser to the president who made this remark at the Securities and Exchange Commission (SEC) economic lecture said that the nation’s capital market could spur growth by scaling up its efforts at providing good information to the public.
Obiora said that investors with reliable information about firms and their management, as well as current market conditions, would increase efficiency in resource allocation in the economy.
He explained that without such intermediation, each investor would face potentially large and certainly prohibitive fixed costs associated with evaluating firms, managers, and economics conditions.
He pointed out that there are large costs associated with evaluating firms, managers, and market conditions before making investment decisions.
He said: “Individual savers may not have the ability or wherewithal to do so, and may be reluctant to invest in activities about which there is little reliable information”, adding that such “High information costs” might keep capital from flowing to its most profitable use.
Obiora said that the degree to which the providers of capital to a firm could effectively monitor and influence how firms use that capital has ramifications on both savings and allocation decisions.
“Although individual shareholders can effectively exert corporate governance through voting on crucial issues, such as mergers, and fundamental changes in business strategies, different kinds of market frictions may make this impossible,” he added.
He said that large information asymmetries usually exist between management and shareholders given that management might have significant discretion over the flow of information.
He said that such scenarios might allow managers to pursue projects for their personal, rather than societal, benefits.
These situations according to him has the tendency to decrease participation in capital markets, especially for middle-class prospective shareholders.
He said that if individuals were left on their own to mobilise all the savings needed for investment, it should typically involve overcoming the transaction costs associated with collecting savings from different individuals.
He further pointed out that financial systems that are more effective at pooling the savings of individuals can profoundly affect economic growth by increasing savings, exploiting economies of scale, and overcoming the indivisibilities of certain investments.
Filed Under: Capital Market