OK, so let's get going. So hi everyone. My name is Dion Filmer. I'm the director of the World Bank's Development Research Group. And uh welcome to this March edition of our policy research talk. Um, as some of you may know, the talks give us an opportunity to present work coming out of the research department at the bank, uh, with the goal of sharing the findings with colleagues inside and outside the department, uh, along with others, uh, across the, the World Bank and outside of it, the World Bank Group and outside of it. So with that I want to welcome our audience both on Webex as well as on YouTube. Um, today my colleague Alvaro Pedraza, who's a research economist in the finance and private sector development team in the department, will present his research on the risks and opportunities from the recent growth of market-based finance in developing countries. So using a novel data set with the universe of transactions in both equity and debt securities in Colombia, Alvaro will talk about the role of domestic and foreign investors in these markets and the implications for market development. We're very grateful today to have Susan Lund as a discussant. Susan is the IFC Vice President for Economics and Private Sector Development. Her team provides economic analysis to support IFC investments, including macroeconomic outlooks, country risk assessments, and country private sector diagnostics. Uh, prior to joining the IFC, Ms Lund spent over 20 years as a partner at McKinsey and Company and leader of the McKinsey Global Institute, which many of us know. Wow. In that role, she served as research economist and an advisor to companies and policymakers around the world. So I'll ask Alvaro to talk for approximately 45 minutes, after which we'll hear from Susan for about 10 to 15 minutes. We'll conclude the session with Q&A from the audience. Uh, if you have a question, please use the raised hand option in Webex or signal to me in the chat that you have a question and I will call on you and ask for you to, to ask it out loud, if you don't mind. If you're following on YouTube, please submit a question in the chat and that'll get relayed to me. Just a reminder, we're recording and I also ask that you please mute if you're not speaking. So with that, let me hand it over to you, Albo. Thank you, Dion, for the introduction. Special thanks to Susan for joining us. I look forward for a lively discussion at the end and thanks to the audience for joining this conversation. Um, since the global financial crisis, flows to, uh, flows of capital across borders have experienced, uh, tremendous growth, especially to emerging markets. There has been an important shift in the landscape of, of these flows, of these closed border flows. And let's take a, a look at global banks, for example, and by that I mean banks that operate branches or subsidiaries in host countries. According to the Bank of International Settlements, the share of assets by foreign bank offices relative to the banking sector where they operate have been mostly stable over the last decade. In the case of emerging markets hovering between 16 to 19% of the total assets in these countries. Now, in contrast, for portfolio flows uh by institutional investors, think about pension funds, investment funds, insurance companies, government funds, etc. have experienced a major growth, both in absolute and relative terms. In the figure to your right, you can see that total flows to emerging markets reached 3.5 trillion uh at the beginning of 2020, right before, before the COVID crisis. Now, these, these are absolute numbers, but uh But they look quite similar. There's a similar trend if I were to show you relative to domestic assets. In this, in this example, in the case of Colombia, I'm showing you the, the holdings of sovereign bonds by non-residents. Uh, in 2020 and 2010, uh, in the beginning, at the end of the last decade in 2010, this looked quite small relative to domestic assets to the total, uh, debt outstanding. Now, by 2020, the picture is quite different. Total holdings by foreign investors represented more than 25% of the total debt outstanding by the, by the Colombian government. This, this actually, these numbers will be quite similar if I were to show you total investment by foreign investors in domestic stocks in the case of Colombia and in many emerging markets, it will look very similar. Now, despite these trends, port portfolio disclosure for non-bank financial institutions and individual, for individual investors is actually quite limited. Even if we were to look at uh do some domestic investors in these countries. This perhaps best, best put by uh, uh, an article in The Economist uh earlier from this year and I quote, you can tell that the value of the global portfolio investment has soared but not precisely what is invested, um, or by whom. Now, contrast that to, to, uh, cross-border banking, for example, we know quite a lot about that because the BIS have been collecting data on this for over 60 years in many countries and for, for multiple banks. So this growth in market-based finance represents an immense opportunity, uh, For the host countries that they're receiving these flows, but it might be also masking some underlying important uh risks. So in this talk, I want to sort of give you an insider's look. Um, what if we were able to, to observe detailed portfolio data, uh, portfolio holdings, transactions of all investors participating in a market. Even a very high frequency. What's, what sort of uh policy relevant questions could we address if that were, that were the case. So in particular, I wanna, uh, to be concrete, I want to uh present research uh in a research partnership that we started with uh Universidad de la Savana in Colombia and the Colombian Security Exchange in which essentially we're allowed to look at the, the universe of transactions and ownership of both Colombian stock and bonds since 2006. Um, I hope that by the end of the talk, you'll see that, that the research that I will present now, we've only scratched off the surface, but if anything, the, the results I'll present today are, are perhaps a call, uh, for regulators around the world to think about how do we, do we improve and we improve our coordination to have better data, better portfolio data, uh, in, in cross-border in general. So just for clarity, I divided the, the talk into three sections. Uh, it's related to 3 different set of like research topics that we have in mind. We're gonna be looking at asset demand elasticity, owner ownership concentration in these markets, and the promotion and the participation of investors in these, in these countries. Now, without further ado, let me, let me start with the first, the first set of, of, of analysis that we're looking at which is asset demand elasticity. So by this, what we have in mind is think about how a shift in the specific demand for for some assets will affect prices. So the quantitative number, the target that we have in mind is what is the price impact of a 1% demand shock. If a group of investors demand 1% of, of the, of the supply of an, of a particular uh security of a particular asset. What will be the price impact of that additional demand? So that parameter is actually quite important for policymakers and it's, it's key to understand many questions in financial economics. So, at least 4, maybe they're, they're in different areas, but all of them are, are important. One would be, is related to how shifting foreign demand, uh, foreign asset demand affect domestic prices. It's also, it's important to estimate the impact from quantitative easing on asset prices and we know that uh during the COVID crisis, many developing countries Um, monetary authorities, monetary authorities in these places experience with asset purchases for the first time. And we also know that, that in the new phase when we're gonna see some, some balance sheet uh reduction by, by central banks in starting in the US and, but then also in many other places that will have some impact, uh, for, for asset prices in, in these countries and in particular, we think about having impact on the distribution and duration of market risk across investors. It's also directly related to, to, to policy in the sense that think about Basil 3 and another risk-based capital regulation for non-bank financial institutions that might affect the demand for some investors of uh uh fixed income security. So for example, insurance companies might shift or change. The demand for, for bonds, uh, for some set of bonds and that might affect a corporate yield. And then finally, but not, not least, uh, as important, we can use this, this idea of asset demand elasticity to assess how socially responsible investment affect firms investment decision through the cost of capital. And just to be more precise, to think about a, a simple A simple example, uh, of, of why, why do we think this, this measure is, is important. So imagine we're in the middle, we, we have some, some new shifts, some new shock or new demand for green firms. It might be because of regulation, it might be because of preferences, some, some investors just want to purchase more, more green assets. So in a world where there's high elasticity of substitution across assets across firms, now you have a, a residual group of investors that might be able to absorb that, that shock or might be able to accommodate the shock just by selling their green assets, but they will immediately buy brown and, and neutral firms. So in this world, there are no, no price effects because there can easily accommodate the shock, meaning that the green firms actually don't see any, any benefits in terms of uh improved, at least in the short term where there, there is a, a fixed supply of assets. They see no, no reduction in, in, uh, in funding costs, for example. In a world where there's low elasticity, elasticity of substitution, um, between, between assets and firms, then in, in that case, the residual investor, he won't, he won't be able to easily accommodate the shock and it will require a premium to actually sell, uh, uh, absorb this new demand. So in that world, there are actually large price effects, uh. Uh, on, on the securities and then even so the, the effect on green firms, for example, will be, uh, uh, a required reduction in, in, in their funding costs. So again, all that to say that, that this, this, the core of, of this, this part of the, the analysis thinking about uh why this demand elasticities uh matter. So the way in which we're gonna think about this, it's actually quite, quite standard in the literature. It's a shock that is being used quite tan. It has been used in, in, in different contexts in, in, in, in, in finance and it's this idea of index rebalancing. So think about uh this is the case when we have additions and deletions of stocks into of stocks and bonds into major indexes. So for example, the S&P 500, Russell 2000. So these, these index recompositions um entail sudden and large demand shocks for effective securities simply because there are many investors that have very strict mandates to, to follow or track this, uh, these indexes. In the sense that they have to build their portfolios, they have to look exactly like, um, like, like the index. So there's a shock in demand for securities that, that are included in the index, uh, and might be a negative demand shock if the securities excluded. So it's a quite large literature on this and they, they have been documented, um, there's extensive documentation of price effect in these, in these cases. But the evidence is, is, it's a little bit more blurry in terms of the, the behavior of investors around these events because there's not usually very good high frequency data on portfolio. So what do investors do around these, these events? Um, and even, even low-frequency data only covers a subset of investors. Now, this is problematic if we're thinking about the demand elasticity because, of course, we need on the one hand, we need prices, price effects, but we also need quantity. So who's trading and, and by how much. Um, and even within the, the most advanced studies using, uh, you know, the Best technology to, to, to estimate uh the effect of these events, the, the estimates vary widely because they don't, most authors don't actually see the quantity, so they have to make some, some, um some estimation of, of what, what is the expectation or which type of investors will move around these events. So, in the case of Colombia with, with uh all three co-authors uh just mentioned, so Mariana Escobar from the Central Bank and two other co-authors, one here in the US and one in Italy. So we were looking at, um, this, this, uh, case of index rebalancing in the case of Colombia, and we, we use, uh, additions and deletions of Colombian stocks from MSCCI indexes. So these are Morgan Stanley Composite indexes, and these are perhaps the most popular in indexes in, uh, in emerging markets. Um, so basically what we're gonna look at is what happens when a Colombian stock gets added to the index and when it gets deleted, and we're gonna look at prices, price effects, we're gonna examine changing quantities and very, with very detail into which types of, of investors are, are moving around these events. And then finally, with those 22 numbers, we're gonna estimate the man elasticities. So for those of you who know this, these, these events and are familiar with index rebalancing, uh, this might not sound shocking, but just, just to give you an idea of how this looks like, um, Morgan Stanley would announce that a particular stock or a particular new group of stocks is gonna be included in the index that typically happens in the middle of the month and then by the end of the month, 11 to 17 days, uh, later, business days later. Uh, the stocks get actually, um, it, the, it, you see the implementation when the stock actually, uh, it's included in the index. So in terms of price effects, we see that most of the price effect is on the, on the announcement, right, right around, around zero. There's some additional drift in, in that the price of a stock that is included will, will continue to increase, uh, somewhat, but most of the price effect is, is upfront. Um, in terms of flow, so what happens with, what are investors doing around these events and we can focus in the, in the, in this case, we focus on foreign investors because for MSCI indices, this is, um, it's mostly international investors that track these indexes. And this is are the, these are the, to your right, you can see the cumulative purchases, um, of foreign investors relative to total shares outstanding. So the picture is a little bit different in the sense that the announcement is made on day zero. there's only a small purchases relative to, to total shares, but the most of the action is actually, actually happens on the implementation day. Um, overall, we see that, that these index events generate sort of uh around 2.5, 2.6% increase in the demand from, uh, from foreign investors into these domestic stocks. So you can see why these shocks are very useful with, with, we can observe prices and we can also observe demands. And importantly, we can not only observe demands but we can look at a little bit beyond that and see what are precisely foreign investors doing around these events. So, There are some investors that have very strict mandates and we think about this, uh, like exchange-traded funds, passive mutual funds that they literally track the index, uh, on a day to day basis. So these investors, as expected, you, we don't see or only a very small movement before the actual index, uh. Uh, inclusion before the actual implementation date and there's only quite small demand before that and most of the action is exactly on the event because this, uh, this, this group of investors are very passive and again they, they just have very strict mandates to, to track the, uh, track the index that they found. But there's another group of, of foreign investors that perhaps, uh, are not necessarily strictly passive, but they might use the index as a benchmark to track the performance, for example. And these investors I'll, I'll, I'll, I'll just mention here, let's say government funds which is the orange line, uh, um, and you see that this Despite that they're not explicitly passive funds, they behave quite, quite passively, only rebalancing on this, on, on the day on the implementation. Or let's say other pension funds, foreign pension funds trade a lot during the implementation date and then some active funds trade ahead, but there's also quite some. So if you see some active mutual funds, they trade early, but then, uh, they trade a lot during the implementation. So this is just to say that, that the shock not only affects very, uh, Funds with very strict mandates but also a larger group of, of foreign investors and actually in our estimates, we see that, that the effect on non-passive funds or those that we don't, that not extremely passive, it's almost twice as much as the, uh, as the, the demand shock is almost twice as much as the one for, for passive funds. Importantly, and just 11 last comment on this, on this figure, um, so we typically believe that arbitrators should be helping to absorb the shock in the market and in this case, we look at trading by hedge funds and interestingly, yes, they do trade in the opposite direction on the, on, of the index recomposition, so it's, it's the red uh line in the bottom. So they trade in the opposite direction, but they're The, their choices are quite small to, to absorb the shock. So overall, this, this picture, what it, what in, if we add all this, this picture up, so what we see is the following, we see, on the one hand, yes, there's large uh price effect around 5.5% of abnormal returns uh between announcement and implementation and by the way, by the way, these price effects are permanent if we look 60 days, 3 months after the, the implementation. So what happens with changing quantities, we see that there's a large increase in demand by foreign investors, both passive and importantly non-passive funds, and those are quite, quite large, and these are not absorbed by, by arbitrators and the combination of these two things, price effect, uh, large demands, and not, uh, uh, the fact that we don't see a lot of arbitrators trading in this case. That, that means that, that the, that stock demands are quite inelastic. In our estimates, we see that a 1% increase in the demand uh of these, of these securities leads to a 3% uh increase in stock prices. Now, uh, this might just seem like an, an, uh, uh, an effect in secondary marketing prices, but we know that this is important in terms of the real effects and And this is something that I wanna, wanna highlight here. We, this will mean that firms will, uh, there will be a reduction in the, in the cost of capital and there's some quite, quite evidence on, on this, um, but just to give you one additional, uh, reason for why we want to care about not only that, that there are shocks into these markets but that the composition and how these, these, these shocks are absorbed matters. Uh, in terms of, um, Spillover effects or real effects. Um, just, just, let me briefly give you one additional example. So I'm going back to the picture I showed at the beginning that, that holdings of sovereign bonds by non-residents actually increased a lot in the last decade. Um, in 2014, actually, JPMorgan included five, sovereign bonds from Colombia into their, uh, global indexes. So that actually generated a lot of new demand shock from, from foreign investors and the foreign investors increased their demand in Colombian, in Colombian bonds. So there's one thing, one important thing happening here is that, so that demand has to be absorbed by someone. And in this case, uh, there's this nice paper by, by a co-author by Thomas Williams, uh, a few years ago in which he shows that some domestic banks that participate as market makers in the Colombian foreign bond market, they were the actual, they were the ones that sold bonds to foreign investors. So that's important because these banks actually, the, the shift in their balance sheets, so they're sort of like this liquidity shock meant that they have uh additional liquidity, additional, uh, um. You know, by selling the sovereign bonds. So Thomas actually shows that there is an increase in credit in the municipalities, uh, increasing lending by these banks in municipalities that, that these banks were operating prior to, uh, to, to the shock. So as I said, not only this, it's the fact that we can track this spillovers, it, it's important because we can see that the effect from, from the demand shock, from the foreign shock, how this, is, uh, trickles down into, into the local economy and the financing, it depends on how domestic investors are actually to, uh, in this case, domestic investors, but, you know, the, the other players of the, what I, what I call the receivable demand, how are they able to, to absorb this particular shock. OK. So that's, again, that's sort of like a first look into, we can use this data to think about asset demand elasticity and in particular how foreign shocks, uh, how demand, how shocks to foreign demand might, might affect local prices and, and the recomposition of, of the balance sheet by domestic investors. So, I'll, I'll shift my attention here to, to a different topic and I'll, I'll, hopefully I'll be able to connect this uh by, by the end of this, this section of, of, of the talk and it's about ownership concentration and liquidity. Um, so again, I, I mentioned something about foreign investors, but let's focus, let's change our focus to domestic investors in these, in these countries. So we think about not only domestic investors but in general institutional investors as key players for development, no, they provide professional management, they provide funding for firms, enhance market liquidity, and they also promote. Better corporate governance, uh, they promote transparency, and they also might be, uh, might be very active in the corporate decisions of the firms where they invest. So overall, we tend to think about institutional investors in the, in these markets, uh, being, um, a, a conduit for market, market development and financial development. Now, the, the problem with this is there's, there, there's a market friction that we often don't think about uh uh in, in, in general and it's, it's a problem with in developing, not a problem, but it's, it's just a setting in developing countries in which we know that business groups dominate uh private sector activity and what I mean by business groups are just collections of listed companies, listed and non-listed companies with significant amount of, of common ownership. Um, so think about, uh, Keretus in Japan, Chaebols in, in South Korea. So the, this, are groups that there's a lot of, uh, common ownership among them. Now, importantly, if we, there's, in this case, money management institutions, so think about pension funds, investment companies, they typically have tied to, to these business groups. So, so in a way, we're starting in a world in which we think institutional investors are completely independent and they might help better corporate governance, and enhance market liquidity and so on. But that's, that's a setting which, in which these companies, again, these management companies are completely independent from, from, from the operation of, of, of, of the business groups in, in the country, but that's not the case. We know that these, these companies actually have very strong ties to business group in these countries. So that, that generates an important friction uh in these markets. Um, on the one hand, it, it enhances managerial entrenchment because institutional investors that belong to the group actually might, you know, might help protect the company. Um, and it might increase the, the agency costs for minority shareholder shareholders, um, in my vote in, in the, uh, in the board to, to promote, uh, um, uh, corporate, uh, corporate decisions that might not be beneficial to, uh, to minority shareholders. Think about, uh, not paying the, no, no, not doing any dividend payments or, and so on. It's, there's also an additional friction that is quite important is that, that these institutional investors might access to private information in affiliated firms, uh, because they belong to the group, they, they, they know the, the corporate activity of the companies in the group and they, that access to information might be useful into the timing, how they, they buy into and out of these, these securities. So overall, the, what I'm, what I'm trying to say is that this, this ownership concentration and this business group ties, this, all this relationship. Might, on the one hand, you know, exacerbate information as as symmetries and it might discourage investment uh from all investors and might also increase uh capital costs. Meaning so that there is, there is this disconnect between what we think theoretically that, that an institutional investor, institutional investor might, might behave in this market when, when we're in, in reality, these, these institutional investors are connected to, to, uh, business groups. So just to give you an idea, some of you might be quite familiar with business groups, but these are hopefully a quite a good example in which we, we can like sort out this connection. So let me start, let me start on the left. The bottom left where you see group of articles. So this is, uh, bottom left. So this is an investment holding company that we has, which has interest in infrastructure, cement, energy, and so on. So this is, this company, which all these companies I'm showing you here are publicly listed in the, in the domestic stock market. So this company owns, let's say, 58% of the cement company which is called Argos, 52% of Celsa, which is an energy company, but I'm gonna focus on the lower right, so in, on the low, lower here. Uh, so they own almost 10% of a food company that's called NTRSA. So, Argos, uh, owns 10% of NTRSA, food and food industry. Uh, and there's also another uh investment company which is called Grupozura, and they also hold Uh, they have, also have important holdings in different companies. If we look at the ownership in Nutresa, it's 35%. So between these two companies, they own, let's say 45% of, of this, uh, food, food company. Now Where do institutional investors come in play here? So at the top right, you see there is one pension fund management company, which is the majority shareholder is Gruppourra, again, an investment company, um, an investment holding company. Uh, so this institutional investor, it manages defined contribution pension accounts in the country. Um, and their investments, uh, of, of this, the, the investments of this company are also, uh, a, a large portion of them are also in, in stocks in the country and in, in, in a, in a large proportion in companies of the same group. So you, you start seeing this web of, of ownership in which protection, they also have ownership in NUTRSA which is around 6%, well, back then it was around 6 to 7%. So overall, what, what the business group through their, their, their web of ownership and through institutional investors, they increase their, their, their ownership in the company and even though it might look like ownership is quite diffuse, it's actually very concentrated in the end. So why, why is all this, uh, why do all these matters? And again, as I said, the, the my increase uh asymmetric information in these markets. So again, looking at this, this trading data and how investors behave in these markets, we actually look, um, uh, uh, in a paper it's entitled uh Informed Trading Business Group. We, we look at, uh, we found evidence, we found actually systematic evidence of informed trader trading in, uh, by institutional investors in companies that belong to the same business group, meaning how do institutional investors trades in companies that are affiliated. Now, since a picture says more than 1000 words, I'll give you one example of how this, this looks like. So this was back in 2009, uh, a particular company in one of the largest business group in Colombia announced that they were going to To, um, to acquire one of the largest energy, energy production, uh, companies in the country. That was announced, uh, late September that year. So Um, in blue, in the blue line, you see the, the purchases of, uh, the pension fund, uh, that's affiliated with that particular business group, and you can see that the way in advance they started, uh, started purchasing shares in that company while all pension funds in the country or, um, uh, pension fund management companies, uh, on average were actually just, uh, they were net sellers at the beginning and they, they, they only did some minor purchases, uh, before the announcement and they increased their purchasing right after the announcement. So, of course, you're, you're probably thinking, well, we're, we're doing some sort of, some sort of forensic finance to try to see where they're, they're, uh they're gaining for the informa from the information that they have. And the flip side of this, of course, is because they trade in advance when the news came out and this was positive news to the market, the, the company that traded early, it generated over 40% in excess returns versus um other funds that were not affiliated. Now, this is, I, I don't expect to surprise anybody with these results. We're not thinking that these, these players might behave altruistically in any way, but, but it has, it has uh some, some important implications and as I said, we, we, we did this at the end, what we try to do is we look at corporate events and we, we try to see where they consistently we're using sort of uh private information in these cases. But the reason why this matters it's it for financial development is, it's, it's actually manifold. I mean, on the one hand, we have that, you know, adverse selection discourages outside investors to participate in these markets. And it actually increases the agency costs for minority shareholders. We actually, we use um the merger between pension fund management companies um during that time to actually estimate the effects on liquidity and cost of capital. So actually to get some causal, causal inference into what does it entail for liquidity in this market and the cost of capital for firms. And interestingly enough, we found that, that some of these stocks actually trade at a large discount between 8 to 15%. Now, if you're a company that belongs to a business group, yeah, there might be some higher cost of capital, but you might be able to offset, offset that because you have internal capital with, with the business group. So it's a trade-off between the group is relinquishing control by uh having a lower, lower, uh, um, lower ownership or it might have some higher cost of capital, um, low, let's say low stock prices, higher funding costs, and so on, but, but at the same time, it has more control. So it's this, this trade-off between control and And, and the cost of capital. On aggregate on equilibrium, the important thing here is that, that there's, in equilibrium what we see is that there are, there's a reduction in the incentive for public listing. So, um, if you're a company that have no business group affiliation, it's highly unlikely that you will, um, you will list in these markets because of this, this cost of capital. So in equilibrium, what you see in this market is that you either, most of the majority of companies are either state-owned or they belong to, to a, uh, to a business group. Now, Uh, I, it actually, importantly, and this is how it connects to the, to the, the, the evidence that I showed you earlier, uh, during the last decade, in the, in, in between 2010 and 2020 when flows from foreign investors actually grew at a tremendous rate in the country. Actually, there were more delistings in, in the stock market than new listings. There were only a couple of listings and more delistings than, than new listings in the stock market. So actually the market contracted during this time and this is, this is quite interesting because those flows of, of capital from abroad were, was not transformed into deeper, deeper stock market in this case and we, we sort of have a general sense that this is actually quite related to the ownership structure of these firms in, in this market. So in a way, it's a constraint to, to capital market, uh, development. OK. Um, and then finally, let me take the last, um, the, the last part of the talk to, to focus on a, on, on, on a different, on a different topic. We, in the first two, I've talked about uh how a shock to foreign investors affect, uh, their demand for domestic securities and where those have price effects and we sort of mentioned only price effect but real effects in terms of funding, funding costs and so on. And then we look at um uh ownership and domestic institutional investors and how they, they might, yes, they, we, we expect that they, they, they, they allow the market their, their, their tools to improve uh uh financial development but there means, there might be some friction that actually constrain this, their, their effect. But, and then finally, let me think about one group that, that it's also worth taking a look at, uh, uh, as an, as an important investor in this market and those are individual investors. Think about retail investors, small investors. And what are they doing, how do they enter and exit this market. So, in general, we think about, you know, stock, stock market participation by individual investors. So we know, we know that, um, so it, it's sort of again like to complete the picture of foreign investors, domestics, and, and then individual investors. So we know that, that for individual investors in, and, and many investors in general, information sharing with, with peers, you know, social interaction, it plays an important role for financial decision making in general, but in particular is, we know that it's, it's quite important for stock market participation, for portfolio choice, saving decisions, and so on. Um. And actually, there's quite some lit, there's some literature that shows that social interactions improves financial literacy, improves saving decision, debt management, how do we manage credit cards, and so on. Uh, but there's also evidence that pre-influence might be a conduit for spreading biases and, and investment mistakes. So, um, In a way, so we know that, that again, on the one hand, period interactions might improve financial decision, but it might also be, be, be spreading biases. Uh, and we know that individual investors when they invest actively, they, they tend to generate inferior returns. OK, so the question that we had when we're uh looking at this is where interactions by in the, in, where social interactions in general exac exacerbate or mitigate this tendency, meaning do they actually make investors better at, at, at, uh, at their portfolio decisions or they're actually worse, uh, and, and enhance the typical biases that we see among investors. Now, going back to what we've been, what, what I've been showing you, the fact that we have some, some nice data, some nice access to the universe of transactions, we can actually try to do some of this. So in a paper with, uh, with Laura Escobar, um, it says it's just a, uh, it's a recent paper, um, and I'm, I'm looking forward, I know, I know there's some comments on this, some important comments of this because actually individual investors have been quite, there's been quite some growth of individual investors in, in recent times. Um, in, in many markets and we can, we can get back to that. So what we're gonna do, what we're doing in these papers, we're gonna identify peer effects in stock market participation. We're gonna think about how, how investors transmit their strategies, their decisions across individuals when they interact. And what we did is we use a natural experiment which was a high stakes, high-stake environment and this is a setting in which there was a national uh program uh for students to train and study about stock trading and, and Stock market in general. So we sort of combined this, this uh financial training program, this national financial training program, um, with the, with our data on, on, on stock transactions, and we also did some survey on social interactions in this, in this, uh, in these classes. So, Again, let me, let me show you, show you a picture of what we have in mind here. So this was, it was a national strategy in which um the stock exchange actually through a partnership with universities, with chambers of commerce in many different cities in the, in the country, uh, start a program to, to teach people how to, to invest in the stock market. Uh, there were over 1300 such courses and, uh, close to 20,000 students in these classes, um, all throughout the country. So the, the important thing here is that, so a group of students, let's say around 16 students sit in a classroom to learn about the stock market, learn about stock trading, and so on. But the, the assignment to students to these courses are not based on, on experience, are not based on uh on education. Uh, gender or anything. It's just simply, it's a sign based on purely on, um, Uh, uh, uh, on availability. So it's sort of this quasi, um, uh, quasi, uh, quasi random assignment, not, not entirely random, but some quasi-random in the sense that you don't know your classmate ex ante, uh, most of them at least when you registered to, to these, to these courses. So you might be sitting down in a class where all the students in that class have no experience, meaning they, they haven't traded before, they've never purchased a stock or, or, or, um. Uh, or a bond in general, but in this case, we're gonna just focus on stocks. They, they never purchased the stock. But there's some students that you sit in a classroom and that might have some, some experience, and I, I, I draw them here as uh this, this shade of, of gray and their actual experience might matter. Some of them might have traded in the past and they might have some negative experience, meaning some negative outcomes, they traded. They have a really poor performance and some of them actually have some positive performance when they traded, they bought a stock at a good time and then the stock went up and, you know, that, that's sort of, we, we qualify as a, as a positive outcome for, for that investors. So what we did again using uh leveraging with all this information, we're gonna examine these courses and we're gonna look at how investors when they finished one of these classes, whether the interaction among students that have no experience or different type of experience, meaning negative or positive. Outcomes, how would this affect uh participation, not only participation, meaning do you start uh buying stocks, but also how, how they affect the, the type of strategies that they use, how active are they in the market when they enter, um, and we're also gonna look at, at performance. So I won't, I won't get, get into the details because that, that's the, the, the purpose of the uh the detail of, of the data and the analysis but uh let me just briefly share with you some of the, some of the results. So what we find is that As expected, so, you know, exposure to classmates with trading backgrounds leads to very high market participation and, and those in our estimates were, were quite, you know, economically meaningful in the sense that being in a class with somebody who has some experience matters, matters a lot. And importantly, there's, there's this additional effect from positive peer returns, meaning that when you, when you're in a classroom with somebody who has been high returns in the past, mostly in the few, in the months um leading to the, to the class, in 6 months leading to the class, that also increased market participation as well. Now, there's, there's no marginal effect from negative outcomes, meaning that if you share a class with, with somebody who has really negative outcomes in the past, really doesn't uh uh deter you from entering, entering the market and, and we'll get to that in a second. Now finally, something that we've seen in the, in the literature, so all these results have been um documented in different setups and we actually see that, that there's a lot of correlation in purchases between experienced and inexperienced uh investors, uh, meaning that when they leave the classroom, they, they tend to buy, uh, purchase and sell the same, the same securities. Now, perhaps, importantly, or like, as I said, all of these have been somewhat documented in different, in different settings, but the nuance of, of the, the novel part of the, of this analysis is when we look at investor performance. So I'll, I'll use this, this fear just to, to motivate this, this last part of, of, of, of my talk. So, we organize the courses from lower peer returns, meaning if you attended to a class where Your peers, your classmates have really low outcomes and to your right are the classes where the peers have the most positive outcomes. So, and then we look at the, the peer, uh, you know, how these experienced investors experience quote unquote because they're, they're actually not experienced in the sense that they're, they're, they're not sophisticated. They just, they just have some traits in the past and we define it in multiple ways, one trade, multiple traits, we, uh, that's something that we can discuss, but the point is that they had some trading experience, uh, prior to the course. Now, interestingly, if you see the, the, the blue dots, um, when we look at their performance after the class, so this is, this is uh in the, in the vertical axis you see performance in the year after the course, they actually, all of them are underperformed. So in this case, being An experienced investor is just being somebody that has some experience in particular, just, that just trading in the past, but that doesn't make them more sophisticated. We actually look at their portfolios, they're no more diversified, they're just simply, um, they're just simply investors are selecting high volatility strategies. Um, but importantly, as you see, when we look at the performance of new investors, meaning those that didn't have any experience prior, but the attended to any of these courses, you see that to the right side of this, this figure, the performance looks very similar, meaning that, that new investors were drawn to the strategies uh of Uh, experienced investors. So actually when you, when you share a classroom with this, uh, high-performing, uh, classmates, you end up with, with, with strategies that are very much alike and in this case, we show that they, they both underperformed. So this was quite important for, for, for two reasons. So what we see is that, that new investors that share this classroom with successful peers actually, you know, underperform other rookie investors and there's this high correlation in, in, in their trading. So basically, the, the idea is that uh the, the channel that we, that we highlight in this, in this paper, and again, we did some surveys to think, to, to ask about social interactions and so on. So it's, it's a different channel than what we think about um uh it's, it's a different, it's, it's a different challenge in, in how, how, uh, social interactions might affect investors. So in this case, This positive return attract new investors. Uh, but the results are not because these investors were either more sophisticated or have, you know, better strategies. It just simply, it happens to be that they have portfolios with high idiosyncratic volatility and then these other, these new investors are sort of attracted to these, to these strategies. So in a way, social interactions are promoting this adoption of high volatility strategies, even without the inherent preference for, for volatility. OK, so, so we don't need to assume that investors, they just really like gambling, for example, gambling strategies, is simply that because of this, this, um, this, uh, there is, there is more um saliency for strategies that, that generate high performance even though it's because of very concentrated portfolios with high idiosyncratic volatility, but because they get a lot of, uh, um, a lot of marketing or a lot of um Uh, exposure in, in social settings, then we see a lot of adoption of those strategies for, for new investors. So this is, this is quite important because we don't need to, to think, to, to allocate, to think that investors in general just simply prefer, you know, uh, high volatility stocks or gambling and, and so on. It's just simply that social interactions sort of promote these, these, these, these settings. And I mean, we, we sort of, we speak to, to different, uh, uh. And so the literature and one is, one is this self, uh, you know, self-presentation bias in a way in which, you know, the transmutation, you know, in social settings, you might be selective of the information you want to share and then there's this bias towards transmitting positive outcomes. You think that, you know, investors might like to recount to others, their investment victories more than their defeat, um, and this is useful because we, we think that, you know, these bias signals dis disproportionately attract investors to, to equity trading. Now, the, the, the lessons are, are, are many, but, but I want to just highlight the last two bullet points here, um, to, to close out, close out uh my talk. So there might be, you know, there might be potential benefits to targeting a policy of people with, with central position in social networks. So, uh, perhaps it's best way to, the best way to think about it is, it's an example from, from Chile. Uh, in a nice paper by Da and, and, and his co-authors in which they look about how, uh, uh, uh, how Um, workers in Chile using their pension accounts, their pension savings, try to time the market, and they try to time the market to move from stocks to, to bonds in Chile using, you know, their, their, their individual accounts, um, following some, some cues, some signal from, um, Uh, from, um, um, um, from, uh, uh, you know, some advice investment companies. Um, and it's interesting because at the end when what they see is that, that this, this timing in a way, uh, what generated is a lot of price pressure and increased volatility in financial markets would actually under undermine price discovery. So when we think about what individual investors do within. That they're just simply noise traders. They don't have volatility because somebody will buy, somebody will sell, but what happens when there's some sort of coordination between investors and then you get this, this higher volatility, uh, strategy. So in a way it's like you can think that, you know, the, the Um, social media, internet groups and, and chats about investment decisions might, you know, might actually help disseminate these, these high volatility strategies and this will actually um undermine, uh, undermine stability. In that sense, investors are no longer just noise traders, but they're coordinated traders that might, might affect, uh, markets. We saw a little bit of that in, in the meme stock mania in, in the, in 2020. So, um, let me finish, um, all these remarks and, and sort of like put this, put this, uh, whole thing together. So in a way, we, um, cross-border investments are You know, they, they, they involve issuers in one country, buyers in another, so it's hard to keep track of, of where they are, but, but as I, as I show, hopefully I've shown you today, for having good portfolio data is useful to rebuild new opportunities and challenges for develop, uh, to develop equity and and bond markets. So, Again, I know this, this is hard. The data have been improving over time, but still it's very, um, what you see in the data it's, it's in different jurisdictions, you might be able, in our case, we're able to zoom in Colombia. Perhaps we don't need very, uh, detailed data in terms of trading, but if we were able to at least observe better Portaholi holding, holding data, that will be useful to think about the impact from different shocks, how this, uh, trickle down to economy, spillover effects and so on, something that I I told you earlier. Now, one topic that I left out, uh, that we, I didn't uh talk about today is private equity flows. So we know that private equity flows tend to lack portfolio flows to listed companies, uh, because of their level of risk, level of sophistication, and so on. But these are important sources of funding. In the case of Latin America, they've increased from 1 billion a year, still small in 2011, 2012 to over 16 billion. In 2020. So, again, still small, still small, but they have increased. These are important sources of funding, but it's also useful to think about, you know, what's their future, what are the type of risks that they entail, and we sort of, we should be able to connect this with the rest of the, the investment by, by other portfolio, uh, and, and other investors. So without, you know, for, that's basically what I have for today and again, thank you for, for your attention. I'm looking forward to discussion with Susan. Thanks, Eva, fascinating and, and, and at least the first two were incredible use of this, this new kind of comprehensive data. Um, just a reminder, if you have a question, please kind of raise your hand in the chat, um, or just put your name in the chat and I'll call on you afterwards, uh, but let me turn it over to, to Susan for some reactions. Oh, great, and you're sharing my slides for me. Um, so first of all, thank you for inviting me. I found these papers very interesting, if not honestly a little bit depressing. Um, so let's go through, I'm gonna blow through some slides very quickly and then open it up to Q&A. So if we can go to the next. Uh, so what I'm gonna talk about is really what we've learned over 30 years of really the surprising complexity of creating effective equity markets. And note, I'm not saying efficient, I'm just saying reasonably effective, um, and then I'll comment on each of the individual papers and give and throw out some ideas for future research. So if we can move ahead. Uh, first point is, um, there was a well-established literature going back literally to the early 1990s emanating from this very institution, the World Bank Group, about the importance of developing effective capital markets, both debt and equity, in addition to banking systems, and it's important for savings mobilization. Effective and efficient resource allocation, price discovery, creating the right management incentives, um, and there's, uh, many authors, uh, Osley still here, most of whom have, have moved on from the bank. Um, and so I read these papers really in that context. Well, my interest is really about how do we create effective equity markets to fund development. Now, what we've learned over 30 years, uh, and if we go to the next point, is that it's really difficult. We used to think that it was a matter of setting up a stock exchange, creating some regulation around share trading, and that's what I would call the hardware of the market, but it's very difficult to get the supply of companies listing. And demand of investors for equities, right. So what we've now learned many years later is that many, many things go wrong. Uh, you have markets that are too dominated by retail investors, causing casino-like trading and price volatility. So I have not looked at the recent data, but the last time I looked at this, which was probably 7 years ago, if you look at the annual turnover on the Shanghai Stock Exchange, It was in the realm of 600%. If you compare that to uh New York Stock Exchange, it was under 100%, say 60, 70%. That means that the average share listed on the Chinese market was trading hands 6 times in a year compared to, you know, every year and a half or so on a more established market. And that creates as if those of you who have Uh, had the misfortune of investing as a public equity investor in China, huge price volatility and very few returns. Um, other markets we found that free float matters, just listing shares, uh, is not helpful if the company itself or the promoters are holding the shares. Um, in India, they have a new term, promoter. So 40%, and now this is new data. Of Indian equities are held by promoters, essentially those linked to the companies, and they tend not to trade. Uh, we have insider majority shareholders acting in their own interests. Um, I could pick on many different companies, uh, and I'll talk about the business groups in Colombia, but look at the big tech companies in this country. Why are Amazon and Google not paying dividends? Well, because the owners still have controlling shares and have decided in Google's case, they want to invest in space and AI and this, that, the next, and in Amazon's case, they want to expand, um, you know, into every next business line. We've got poor financial disclosure that hampers, markets, and then just poor governance and, and lack of board independence. So all of this for the next point, has meant that The rationale for investing in emerging market equity markets was, was diversification. In fact, returns are very highly correlated with markets in the US and Europe, and at least over the decade between 2010 and 2020, the MSCI overall returned 3.7% per annum compared to 5.3% for MSCI World X USA and 13.7% for S&P. So, I think that this set of papers, if I put them together, Um, what I've learned about the Colombian stock market is that, uh, it's controlled by insiders linked to the institutional investors that are supposed to provide an outside-in view. Uh, we have retail investors who have very little experience now flooding into the market, and when you look at inclusion in MCI you got a price boost. But I think there are questions about whether that's actually an information signal or just hurting behavior on, on, um, the, uh, the part of active investors trying to match, match benchmark indices. So that leaves me a little bit depressed, but I think that there is scope for lots of research to do here and how can we change the situation. So if we go to the next slide, I think my favorite paper of the three was really the market concentration and business group affiliation. Um, I think that the analysis was, you know, obviously a new source of data, really interesting, very careful mapping of the business groups and their links to various institutional investors, um, and it really showed how market concentration and asymmetric information raised the cost of capital, limited market participation, and overall reduced capital raising. I was, I was sad to hear that, um, in Colombia, you've actually got more Listings and new IPOs. That has been true of the New York Stock Exchange and advanced equity markets for well over a decade between share buybacks and companies going private, but I was stunned to hear that it's happening in middle-income countries as well, and it's not a great sign, uh, for startups and entrepreneurs and small businesses that want to raise equity and risk capital. So my mind immediately turns to what are the solutions for this, um, antitrust regulations to limit cross-shareholdings and business group concentration. I thought it was interesting that Alvaro used the term informed trading instead of insider trading. I don't know if, you know, by, by Anglo-Saxon law, it would be insider trading or informed, but clearly that's one question. Uh, financial market regulations, uh, actually, you know, limiting links between a fiduciary responsibility of the institutional investors like pension funds that they're responsible to their shareholders and can't have cross-shareholdings. Um, is it improved disclosure so that market participants can decide, especially for companies that are listed, um, in the MSCI. Um, do we need regional equity markets? Now, in one version of the presentation I saw, um, there is an example in Latin America, but my thought was, are some countries just too small to support their own exchange and, and by pooling countries together and getting more of a mass, would you reduce market concentration through regional equity exchanges? And then finally, I think there's something really important, uh, that these three papers illustrate, which is that it's what I call the software of equity markets or the ecosystem, that you need, uh, equity market analysts who are truly independent assessing stocks and, and digging into companies' financials and meeting with managers. You need the accountants and Lawyers who actually um and auditors who make sure that financial accounts um are accurate and that they disclose cross-share holdings and other links with businesses. You need financial advisors for, uh, the retail investors and business information software providers just so that the data is out there in the market and that without all these things, Uh, you end up, um, in, with a situation like you see in Colombia, and frankly, what you see in, in most, if not all emerging markets, stock markets, which is you've got either family-owned businesses, state-owned businesses, or these business groups. In India, it's a very similar situation that really hamper the effectiveness of, of equity markets. Now, one point I'll, I'll throw in here is that the data you've got is fabulous, and I would love to see related research if you could do it on the impact of market concentration, business group affiliation on firm level productivity, innovation, and returns. So if you could link the financial statements of all the, of all the companies listed, you could look at their, um, Uh, you know, how they perform on the market and, and what their underlying fundamentals are in terms of productivity. So that would be very interesting. But overall, uh, loved this paper, although, like I said, really deeply depressing if you extend this to family-owned businesses and state-owned businesses, you begin to understand why all these middle-income country and lower middle-income country stock exchanges are not performing the functions we would like them to. On the next page, I think now I've got the active trading and poor performance. Um, I think as Olivaro pointed out, this is hugely timely. Retail trading is up around the world. Uh, of course, we have the meme stock investing, but, uh, new data in India, retail investors are now 45% of, um, all trading, up from 34% before COVID. Institutional investor share has declined to, um, you know, under 20% and then as I mentioned before, you've got the promoters. So you've got a market where shares are held by promoters, you've got retail investors who may or probably don't know what they're doing, and then you've got, uh, very few institutional investors who hopefully are the more professional asset managers. So this paper focuses on the naive investors taking signals from high volatility portfolios. Um, I think that it's interesting because the social transmission, uh, could be extended to other things like job markets. Why does everyone go for hot jobs in tech or IT, um, as well as startups, there have been work done that if you're around other entrepreneurs, you're more likely to start a company. So I think that's, um, highly relevant and interesting. However, I really question the results of this paper and although Alvaro created a nice story of why the results made sense to him. I'm not quite sure I buy it because what we see is that the experienced investors did worse across the board in every quintile, um, and that the rookie investors, uh, in one group did better than the other. Now, I'm just wondering if this is, has to do with the snapshot in time that you looked at, and so it had something to do with market movements or to To me, it's saying, isn't this just reversion to the mean that your experienced investors did well before, now this period that we're looking at, they're doing worse and the fact that the rookie investors, you know, ended up doing better is neither here nor there. So it's quite counterintuitive. I'm not quite sure I buy the story of why any of this makes sense. I'm also wondering about how we define experienced investors. Now, if I will go again to what are the solutions, I think, well, it's very clear that understanding how to invest in the stock market, um requires more than one simple course of trading strategies. Really to assess, uh, stocks, you need to understand, uh, the fundamentals of corporate value creation, uh, you need to understand discounted future cash flows, which is what the stock price should be reflecting. You need to understand the sector. Dynamics and how a company's position vis a vis its competitors, and you need to understand obviously the macro um outlook of the economy it's in. So it's actually quite complex. And as an economist, um, speaking to other economists, I firmly believe in passive indexing investment. I'm quite skeptical about hedge fund absolute alpha returns that are not linked to Basically, uh, insider trading, cheating, um, and as an investor, you know, I learned you can't beat the market overall. Um, so, Going beyond that, I am quite concerned about individual investors, both for themselves and for the market. I'm old enough to remember the dot-com bubble and day trading. The day trading term was coined back then and people could borrow and trade on margin, and there were a lot of individual losses, and as we saw with GameStop, you can have individual stock. Prices become wildly delinked from any kind of underlying fundamentals. So, um, you know, what do we need? Do we need regulatory limits to protect individuals? Um, so for instance, tiered licensing of, of how, of what you're allowed to buy and limits on the size and concentration of portfolios. Do we need to increase transaction costs? So with the new digital technologies, of course, now It's, it's almost costless to do the, um, high volume trading. Do we need to throw some sand in the gears there. Um, and I think overall, we definitely, all this illustrates is you need a core of professional investors in the market to have it work effectively as a price discovery mechanism and reflecting the value of companies. Of course, not the institutional investors that are linked to business groups doing insider trading. Um, and then the last paper, if we move forward on the, um, anatomy of index rebalancing, um, nice support. I don't think the, the results are surprising. I think we know that that inclusion in MSCI and similar indexes increases demand and you get a, a price boost that lasts at least as long as you're included in the index. Delisting, of course, has a negative effect. I think it was really interesting though that, that this paper was able to tease out, uh, the actions of different types of buyers so that you see it's not actually from the passive investors, but many of the active investors, uh, who are simply trying to match the performance of an index. Um, and that hedge funds which could play a contrarian role, of course, were too small to offset. The impact. Um, so I think there's a question, a couple of questions I have. Um, the paper didn't say, but seemed to imply, is this just that this is somehow a price distortion, that you join an index and it's the same company, same fundamentals, and suddenly you get a 5% price boost that persists. But you could make a different argument saying that actually that company was undervalued to begin with and that the world of investors didn't understand the attribute. Yous of this one Colombian company and by having MSCI go out and do its due diligence and inviting that uh company to be listed in its index, it's almost like the, the stamp of approval, and then that opens, uh, the door to many investors to actually understand the value that was there. So, is it, uh, was the issue that the company was mispriced before listing and is now accurate, or the other way around, somehow we've just got an inflated price. Um, so what are the societal costs, if any, from this index effect, uh, and what policy actions would you recommend? So overall, I think, uh, these papers, uh, got my mind back into the importance of capital markets. It's work that we do in the World Bank and at the IFC. There's actually the JCAP program designed to build domestic capital markets, debt and equity. Um, in like a dozen or so countries. So for research ideas, if we go to the next page, First, I would say, um, I would love to see more on what to do about it. As I said, we've, we've known sort of in theory, how to develop these markets for decades, and in practice, it hasn't worked out. So I would love to see research comparing, for instance, if we could measure the quality of board governance in terms of, does your board have independent directors? What kind of committee structures do you have? Do you have an independent, uh, uh, Director on the compensation Committee, does that company perform better fundamentally or worse? Um, we could look at the quality of financial disclosure, uh, participation of institutional investors, and does that matter if it's domestic versus foreign. Um, so I think there's a lot of room to explore and do comparative studies of what seems to improve the performance of equity markets and their basic functions. Second set of ideas um has to do more um exploration of the size, dimensions and nature of the societal costs of market concentration and business groups and equity markets. So is it a linear effect? I, I use the term effective equity markets instead of efficient because I think we all understand that, that markets are not efficient, uh, but some are tend to be more effective than others. But are there nonlinearities? Like how much concentration or informed trading can you have before the societal costs really kick in? Um, are they linear? Are they nonlinear? And, and how do these impact domestic savings, mobilization and resource allocation? Um, and how do business groups that have dual listings and developed markets, which many of the largest do, uh, perform? So do you see some impact when you've got a concentrated group, but it's forced to comply to say, um, the London Stock Exchange standards or New York Stock Exchange standards of disclosure, do they actually perform qualitatively differently than, than concentrated business groups, uh, that don't have that dual listing? Third idea for research has to do with the few examples of, of countries out there that do have effective equity markets and what can we learn from them. So South Korea, after the Asian financial crisis, um, really overhauled its debt and equity capital markets. And that was a country, uh, you know, where business groups called Chaibol, these huge multi-business conglomerates really dominated. And after the 1997, 98 Asian crisis, they undertook a lot of regulatory reform. Chaibol are still uh very dominant. Look at Samsung, uh in, in Korea, but yet they, they have both the corporate debt capital market, one of the very few, um, you know, countries outside of the Anglo-Saxon countries in the world to develop an effective corporate bond market, uh, as well as an equity market. I thought of Israel because it is a small country, so very few, uh, businesses to list. Singapore, of course, I hate even using Singapore as an example because like Canada, it always seems to do everything right, but it's another small market. It has a lot of government control. Tomasek actually owns large parts of SingTel, SingAir, you name it, and yet they've developed an effective equity market. So there may be some case studies. Uh, worth pursuing. Then, next idea on research, next page, yup. Um, what can we learn, uh, if we compare not just, um, companies in one market, but a company, uh, equity market performance across countries and regions. So does it matter what form concentration takes? So in other countries in Latin America, you have like Brazil, you've got Family-owned businesses. Um, in India, you've got, uh, you know, these sort of big conglomerates, much like Colombia. In other countries, you've got state-owned companies. So are there differences in the societal costs or market inefficiencies depending on the form that market concentration takes. Um, in looking over time, um, as foreign investors in All these different types of markets become a larger share and the first chart you shared on capital flows indicates that they are becoming a larger, um, share, then how does that, uh, interact with business group concentration? Over time, we would assume it's being diluted and does that then reduce the dead weight loss to society, uh, from concentration. Next idea, uh, has to do with the, um, rise of impact investing and ESG investing on equity market performance. This is near and dear to my heart because IFC of course, is the original impact investor, meaning, um, all our lending and equity, um, investments are to have societal impact. Um, presumably, these, these types of new investment vehicles that are all the rage should crowd in capital and lower. The cost of equity for firms, but would love to see some research on whether that's true. And if so, I think impact investing is a bit different from ESG investing and there's now many different acronyms and nomenclature. Now we've got green companies, blue companies, and so on, but would love to see um how some of these new types of investment themes uh translate into equity prices. And then finally, Uh, coming to private equity placements versus public listings. And here I'm not talking about foreign private equity funds, but literally just private placements of equity. So, for instance, what IFC and other DFIs do, we literally Do just a bilateral transaction with a company to buy shares. Um, and this comes long before any public market listing. So, there's a Harvard, uh, business professor, many of you probably know him, Sean Cole, who, who found that IFC, the private equity returns, meaning just literally these private placements of equity, um, do outperform over the Long run, but outperformance declines is actually the financial market infrastructure of a country develops, which tells you that this very direct and bespoke private deals are the first way that foreign capital goes into a market, but we'd love to see some of that updated and see how it relates to um the data you've got in, in Colombia. So I will stop there. Sorry if I went a little bit long, but again, congratulations. I like your, your trio of papers, if not, um, the somewhat dismal results that uh they paint. Thank you, Susan for those really, I mean those really insightful comments both, you know, in reaction to the papers, in terms of the policy and then you know that incredible research agenda that you laid out that could keep us occupied for decades to come. Uh but thank you for that. No, that's really, I mean this is, this is amazing. Um. Before turning to some questions, we have a few in the chat, but let me um ask Alvaro if he wants to just have some reactions. I mean, obviously can't go point by point, but if there's things you wanted to pick up on in in in Susan's comments, uh, please have a Yeah, no, I, uh, Susan, incredibly, incredibly thankful for, for all your comments, your insights, uh, it's, it's great, great to, to have you here. Um, just, just a, just a, a couple of things that, that you mentioned that, that, that struck me. One, so related to, to the issue of disclosure and thinking about business groups, um, and then the market integration. So in terms of disclosure, the one thing where we could start, and by the way, you're right, it's insider trading, we, we're careful in the paper not to use it just because of what it means legally and uh anyways, but we can get to that. But um so at least one thing that, that we do, you know, in the US is in, you know, insiders report their tradings in a timely manner within 3 days of the trade, at least that's a way to improve transparency. But if these are, this is the case that we, we go out, the board members, CEO and so if we, if we go outside and look at in the business group, then there should be some sort of reporting within the business group actions, you know, all the companies within the business groups that are trading these companies as insiders perhaps and that will increase transparency. Maybe that will help, maybe, you know, how much, something that we need to think about whether that's, you know, enacted somewhere else, um. Uh, actually, the original exchange, they, they tried in, in Latin America with Peru, Peru, Chile, and Colombia, they tried this MILA or Mercado, Integrado, Latin Americano, but it was more of a, a platform, you know, was allowing the, you know, investors to trade in, in the three markets, but that never, that never catch any traction because big investors, they were already able to, without very low transaction costs, move to other markets. So nothing happened there and they're actually in a new effort to, to Um, merge the three exchanges in actual merge where they will operate. Now whether that will generate actual effects in the sense that, I mean, because the, the company, the, the, the business structure will still be the same within this, you know, the separate countries, but you might say, well, there's might be some delusion in terms of uh ownership concentration that might help, but, but it's a new effort that they're just starting, we'll, we'll see uh how that, that plays out. Very quickly, I, I think your, your thought that you were questioning the results on the, on the transmission of, of, of active trading. Just to mention, you're right, I mean, the, one of the first thoughts we have was, is this reversion to the mean. Uh, we actually look at this and, and it's, it's not because they're actually trading new stocks. What we see, I didn't have time to mention, but what we see is that investors trade more often, so they, they, they have more transaction costs just simply because they're, they're trading more, I mean, they're attracted to these high volatility strategies and they, they get in and out of stocks more and they pay more fees. But you're right, I mean, why, why would we think that if you, if you just enter why on average are you having low, always low returns? I mean, if, if you always have bad returns when you trade, then you just reverse the, the, the strategy anyways. But, but it, you know, it's a good point and it's, it's sort of related to, to more trading more um more active trade. And then finally on the, on the index, so you're right to point that when there's an inclusion into an index, there might be this is salience or recognition issue. Right, we, all of a sudden we have a stock that we pay attention to, then more analysts, then we, it gets better coverage. The counterargument to that is that what happens when it gets delisted. So we already know the stock, we already know what it is, we, it, it cannot be, you know, the unrecognized in a way. Um, so, so we can look separately at deletions and we see similar effects. So, sort of that story, we, we sort of are able to tease out. Different stories and this is more of a distortion type where there's not, you know, an accommodation from the inside, uh, from the, uh, residual demand in the country. But I, as Dion said, I mean, this is sort of a little bit what, what we wanted to get that feedback and thinking, I mean, we're thinking broadly in terms of what was next on, on the agenda, but of course, we're sort of limited with data and we need to make some better efforts to coordinate data abroad because, I mean, here we're concentrating in one country because we have access, but what if we could You know, have a better sense of what investors are doing in different countries at the same time and similar investors actually, that would be also very useful. Again, thanks, thanks again for your comments. I appreciate it. Great, thanks. I'm gonna turn over, we have 3 people in the lineup, but I'm going to give Susan a heads up. I'm gonna ask you a question when we come out of the this Q&A, which is, of the 6 research agenda items that you listed, Like Maybe could I ask you to highlight 21 from a big picture point of view of this entire research agenda, like what do you think is a priority there? And then second, sort of from a very narrow IFC point of view. I mean, you had a couple of items there towards the end which you know you framed as IFC oriented things, and I'm curious as to what you would see on You know, the top 21 from each of those buckets, if you don't mind. But, but before we get there, let me, um, we have Carlos, Paulo, and then I think it's Khuram from Lahore who each have a question. So let me turn over to to Carlos, are you still there? Carlos Madera OK, I'll read this question then, which is, does Latin America have enough size for a regional capital market, or should companies start in the US or Canada exchanges? That was Carlos's question to, to Alvaro and and maybe Susan if you wanted to take these as well afterwards. Um, Paolo, do you want to ask your question? Yes, thanks. Um, basically, Alvaro, the, the question is you mentioned some inflows to sovereign local currency in Colombia after the inclusion of JP Morgan in the excess of Of some of those sovereign bonds. Mm. You mentioned that those inflows allowed for increased lending by the local banks that actually Sold Those bonds to those foreign investors. Did you evidence also some sort of carrying out effect by which those foreign capital inflows slowed? Not only increased lending by those banks but also probably increase issuances and indebtedness by the local government. Thanks. OK, and then last in this round, I think it's Kuram, if I'm getting this right. If not, I'll read the question, which is small investors in the stock exchange have suffered fluctuations due to COVID-19. How should small investors be protected in the future, in the future of this kind of disruption? That's a, that's a big picture question. I'm not sure, but, but if you want to sort of have a go at these, and then Susan, I'll turn to you afterwards in case you want to chime in on some of the responses and then maybe have a crack at my question too. Yeah, uh, quickly, uh, thanks, uh, Paulo for the question. So just to clarify that, that work was by Thomas Williams, a professor at George Washington University, uh, the one with the flows and JP Morgan. So just to clarify that, um. So the, um, yes, to answer your question, yes, uh, funding costs for the government were lower and there there was an increase in, in borrowing as well and we tend to see that, that, that in general, but again, the, the paper was mostly focused on the market makers, so some, some domestic banks that need to, need to maintain the liquidity in the sovereign bond market and they were able to offload some of that and then they see the channel through, through lending and to, you know, tease out the actual effect. They look at uh municipalities where where they are more prominent, where they operate more before than, than after. Um, Uh, let me, so the, the question for, um, For, for, um, from Carlos on, on institutional investors. Um, so, again, I mean, the, the, in, in general, we, we think that, I mean, I, I guess we could accept the fact that, let's say in Chile, Colombia, uh, pension systems designed on, on individual accounts and uh individual capitalization, those actually by definition increase uh domestic savings. I mean, by construction, they increase domestic savings. That's, that's just true. um, and then these were managed professionally managed by institutional investors and we believe that, that helped develop the domestic equity and, and bond market. In the case of Colombia, the, the sovereign bond market is very liquid is perhaps in, in the Western Hemisphere, the, the sovereign bond market is the most liquid. Uh, the market, uh, in, in the entire hemisphere. But what I'm, guess what I'm highlighting in the research is that there's some, some limitations, some constraints to that, that development that we need to consider because of the market structure. That, that's the point that we want to highlight. But in general, where pension funds matter for development, yes, I mean, but again, by construction, they increase, increase savings, um, privacy. Now, the, the, the question in, in the questions on, on fluctuation, that's sort of uh, uh, a more general questions. I'm, I'm with Susan in the sense that I'm a true believer of index investing, you know, if, if you have no, no knowledge whatsoever, if you come to a class of, of, of investments 101, it might not sound very attractive to many investors, but that's uh what we know from, I mean, what we know from the research of 50 years is what works, you know, indexing passive investing rather than, than active uh investing. Anyways, I'll turn it to Susan. I, I think the question about Latin America, does it have enough companies? I mean, it certainly has enough companies for a regional exchange, um, but I think that this issue of how do you treat listing, say, in the US markets is interesting, and, and in that way, this is what is happening and maybe it's hindered Latin American equity markets that the largest companies do list in New York and you definitely see this in Mexico very clearly. Uh, and, and they, you know, trade corporate bonds and issue bonds there too. So, but I do think that if you could pull together, you've certainly got enough, um, very large companies. And the reason that I think you can't just say, well, let's just use New York as our capital market is what it does to the medium sized firms and large, but large, say, domestic companies, but not. Um, international or multi-country players that it's very difficult and costly for those smaller types of companies to raise equity capital. So this is why I do think that, that, that regional or domestic equity markets are important to open the door for startups, for medium-sized firms, for domestic companies. Uh, the largest companies, multinationals, of course, can and do list in London and New York, but at least when they do a dual listing with the local market, they're providing liquidity and, and momentum. But I do think it's a, it's a good question about what is sort of a minimum viable size in terms of number of companies, say, with over 500 million in revenue or something. And Susan, I, I'll, I won't get you off the hook. Uh, Dion has had a, a, a question about that. What do you think about that, so look, my big picture, if I was thinking. and I'm gonna say what I think is useful as opposed to academically interesting, but I, like I said, I think I think cracking the nut of what policies actually promote more effective equity market performance is really critical because at this point, pretty much every middle-income and lower middle-income country has a stock exchange and they all suffer from the problems you outlined in Colombia. And how do we move away from that and, and I guess I would say part of the answer could be looking at case studies like Israel or South Korea. And then I think there's just analytical work to do about um statistically, which interventions seem to, to lower the market distortions. From the IFC perspective, that's an interesting picture because one of the things we try to do. is develop domestic capital markets. Um, and of course, World Bank One, you've probably heard the term private capital mobilization, and you're probably gonna hear it 10 more times today alone. So it's a big topic, uh, and developing equity markets fits into that. But I think also from the IFC perspective, Um, uh, my question is about what kind of price advantage or bonus do you get, for instance, for meeting ESG standards or climate standards or green standards. Uh, there's a proliferation, particularly on the debt side of Sustainability bonds, sustainability linked bonds, blue bonds, green bonds, and actually IFC is often the first creator of these things. Um, on the, uh, so there's a question there about how sustained is that price advantage. Um, and on the equity side, I would be interested if companies that if they're meeting higher standards on Whether it's gender or diversity or climate or other ESG measures, if they actually get a sustained, uh, premium from investors and what does it take in terms of disclosure and auditing to get that premium. So maybe there's a joint, uh, bit of research we could think about on that. Well, thank you, Susan, and, and it's never easy to prioritize like that, but, but that is helpful for for going forward. Um, I think we've, we're reaching the end here. Um, uh, so I'm gonna draw this to a close and thank everybody. Uh, Alvaro and Susan, do you have any last words you'd like to put in before we, we literally close the book on this? Now, I wanna thank you, Dion, and thank you, Alvaro. Um, that was a really nice presentation of your papers and I enjoyed, uh, reading them and, and thinking about this. Thank you Susan for coming and thank you Alvaro for the presentation for everybody for your different and interesting questions and, and we'll hopefully see some of you, many of you at our next uh policy research talk. Uh, so thank you and have a good rest of your day. Bye-bye. Bye. And you Thanks everyone. Have a nice day.

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Since the Great Recession cross-border financial assets have grown nearly 60%. Cross-border portfolios and market-based finance have grown tremendously during this time. This trend has been compounded by market opaqueness, with limited information on the portfolios of non-bank financial institutions and individual investors potentially hiding significant risk in the global financial system. In this Policy Research Talk on March 22, 2022, World Bank economist Alvaro Pedraza shed light on these pressing issues with comprehensive data on the Colombian Stock Exchange.

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Data from Secondary Markets: Insights and Implications for Development

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