Investor Protectionism and Financial Market Size
No matter whether you have a market-based financial system or a bank-based financial system, the underlying theme of both is the same: investor protection. The market-based financial system is very popular in the USA as property and financial asset value plays a big role in its economy. The stock and bonds market created is a big attraction for investors and companies throughout the world. This takes into consideration the fact that investors play a dominant role in corporate finance and governance. Also equity financing holds high stakes in the market.
But when the bank-based financial system is concerned, the financial assets are usually held by banks, insurance companies, mutual funds, pension funds, etc. Equity is not that important and individual investment is concentrated on the above mentioned funds. Banks play a predominant role but the stock markets take a back seat. Investor protectionism gets more importance in market-based financial systems because of the significance of stocks and bonds market. They constitute a greater part of the GDP. A comparative study of the economy of the USA and Germany shows a much higher financial assets stake in GDP for market-based financial systems. USA leads the world in this.
As a direct result of investor confidence, we see a large number of listed companies and aggregate market value relative to GDP and IPO. At the same time, inability to provide protection rights has a bad impact on the integrity and size of the market in bank-based financial systems. Even market-based financial systems have problems when there is a change in government policy, in spite of the shareholders being well-protected by laws. This is more evident during times of recession when the government tries to become more powerful. But our powers of observation tell us that the US market is also dominated by foreign companies. So the rest of the world suffers when the US suffers.
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