geography of stock markets

© 2009 The AuthorJournal Compilation © 2009 Blackwell Publishing Ltd

Geography Compass 3/4 (2009): 1499–1514, 10.1111/j.1749-8198.2009.00255.x

Geography of Stock Markets

Dariusz Wójcik*School of Geography and the Environment and St. Peter’s College Oxford

AbstractGeography matters for stock markets. Stock market actors and institutions do notjust have to be somewhere, but where they are in relation to other actors andinstitutions has an effect on their behaviour and performance. Hence, the geo-graphy of stock markets is crucial to the spatial distribution of financial services andcentres. On another level, the evolution and structure of stock markets involvesa complex interplay of politics, technology, economy and culture, and can neverbe explained with economic models alone. Finally, stock markets do not just reflecteconomy and society, they influence how economy and society work. The currentfinancial crisis only underscores the value of geography as a lens through whichto view stock markets, and the significance of the latter in the world economy.

Introduction

There are stock markets in over 110 countries, with tens of thousands ofcompanies listed and traded, and their combined market value comparablewith the world’s GDP (Dimson et al. 2002). Stock exchanges, while slowlyceding their role as flagship institutions of national economies, remainpowerful symbols of globalising capitalism. Dow Jones or FTSE are house-hold names, and rarely a day goes by without stock market news makingtop headlines in media. Stock markets clearly matter, but why would geo-graphy of stock markets matter?

To start with, stock markets have a geography, as the size and role ofstock markets vary significantly across the world. Consider the top 20 coun-tries according to the market value of listed stocks (referred to as marketcapitalisation) in Table 1. Some countries such as Japan, the Netherlands,South Africa and Singapore punch much above their weight, with veryhigh ratios of market capitalisation to GDP. Singapore in fact has morestock market traded firms than Italy and Spain put together. Second, actorsand institutions that make up stock markets, with corporations and investorsin the lead, do not function in virtual space, and geography, proximity,and even physical distance matter to them. As such stock markets affectfinancial centre formation, urban hierarchy and networks. Last but notleast, stock market development has implications for the functioning ofdomestic and international economy.

1500 Geography of stock markets

© 2009 The Author Geography Compass 3/4 (2009): 1499–1514, 10.1111/j.1749-8198.2009.00255.xJournal Compilation © 2009 Blackwell Publishing Ltd

The significance of stock markets for geography of the world economyis highlighted in the conditions of the global financial turmoil. The growthof stock markets has been part and parcel of the unprecedented expansionof financial markets into the affairs of firms, public organisations and thelivelihoods of ordinary people (Langley 2008; Martin 2002). Althoughthe crisis was triggered by the bursting house price bubble in the USA,the latter was preceded and arguably reinforced by the stock market bubbleof the 1990s, corrected only partially in 2000–2002 (Shiller 2008). Thecollapse of stock prices since the summer of 2008, wiping off approximatelyUSD15–20 trillion from global markets, does not simply reflect the ailingeconomy, but deepens the crisis itself. Without understanding stock markets,geographers will not understand the crisis or its implications.

The objective of this paper is to review the literature exploring theintersection between stock markets and geography, a bulk of which comesfrom financial economics and economic geography; including the author’sown research. The paper starts by introducing the basic terms and buildingblocks of stock markets and their environment, woven into the briefesthistory of stock markets possible. The following section explains how, in

Table 1. Top 20 countries according to stock market capitalisation, end of 2005.

Country Market capitalisation (billion $)

% of total

% of GDP

Number of domestic listed firms

USA 17,001 40.6 136 8861Japan 7543 18.0 167 3858UK 3058 7.3 139 2542France 1759 4.2 83 946Canada 1482 3.5 131 3719China 1457 3.5 65 2503Germany 1221 2.9 44 1014India 1069 2.6 132 5797Spain 960 2.3 85 198Switzerland 935 2.2 255 274Australia 804 1.9 119 1643Italy 798 1.9 46 292Korea 718 1.7 91 1616The Netherlands 593 1.4 100 224South Africa 549 1.3 227 348Taiwan 476 1.1 131 691Brazil 475 1.1 54 379Sweden 438 1.0 124 395Belgium 289 0.7 79 159Singapore 257 0.6 215 564

Source: Author’s calculations based on data from the World Federation of Exchanges (www.world-exchanges.org).

http://www.world-exchanges.org


Geography of stock markets 1501

spite of the ongoing globalisation of stock markets, location remains impor-tant for stock market actors and their interactions, leading to the conceptof stock market centres, constituting an integral part of financial centres.Next, the paper moves on to the role of stock markets in economy andsociety, contrasting arguments put forward in favour and against the expan-sion of stock markets. The concluding section reflects on the future ofstock markets and possible directions for research thereon.

Development of stock markets

Stock markets are markets where stocks are sold and bought. Stocks (orshares) are issued by companies and sold to investors in order to raise capital.In contrast to debt, capital collected via issuance of shares does not everneed to be returned. Stockholders (or shareholders) are co-owners of thecompany, and have the right to influence corporate decision-making byexercising their votes at shareholders’ meetings, the right to collect dividends(a part of company profits paid out to shareholders), and in case of thecompany going bankrupt, the right to obtain a share of proceeds from thesale of corporate assets left over after the repayment of debts. In additionto common stocks (ordinary shares), which give owners one vote eachand identical dividend rights, companies can issue preferred shares, withmultiple votes and/or special dividend rights. When stocks are boughtfrom the company that issues them, we refer to such transactions as theprimary stock market. Shares sold and bought between investors andtraders themselves constitute secondary stock markets (Mishkin 2007).

The existence of a stock market requires the existence of companiesthat issue stocks, known as joint-stock companies or corporations. The firstjoint-stock companies were created in the early seventeenth century,including the Dutch East India Company, which by 1617 had 954 share-holders (Davies 1961). This and other pioneering corporations were givencharters by the state, and acted as prime agents of colonial expansion. Freeincorporation, removing the need for government to authorise the pur-poses of a corporation, became widespread only in the nineteenth century,and achieved the greatest scale in the USA, where it played a prominentpart in raising capital for the rise of the USA to industrial power (Braithwaiteand Drahos 2000). Indeed, the expansion of corporations transformed thewhole economy, as it no longer needed to rely on family firms. In contrastto the latter, corporations could mobilise capital from thousands, and withtime millions of scattered investors, and were not dependant on the life spanof any particular owner. They were much less restricted by space and time.

Primary stock markets cannot survive without secondary markets, whereinvestors trade shares and thus modify their investment portfolios. Tradingcan take place directly between investors, on an over–the-counter (OTC)market, but an overwhelming share of it became centralised in meetingplaces of professional stock traders, who collect orders from investors or trade



on their own account. The concentration of trading in space and time,making it easier for traders to find a counterpart, judge their reputation andexchange information, led to the creation of stock exchanges, with listsof stocks being traded and trading rules established (Laulajainen 2003).Firms listing their shares on a stock exchange for the first time are referredto as going public, a process mostly combined with the issuance of newshares known as the Initial Public Offering (IPO). The first major stockexchange was established in Amsterdam in 1602 in order to trade the stocksof the Dutch East India Company. The London Stock Exchange (LSE)emerged as the premier market when French troops invaded Amsterdamin 1795, and maintained its dominance (though periodically heavily con-tested by the Paris Bourse) until 1914, when the New York Stock Exchange(NYSE) took over (Braithwaite and Drahos 2000).

With free incorporation taking hold in Europe and North America, inthe mid-nineteenth century the supply of new corporations was large andstock exchanges were plentiful. The USA had hundreds and large Euro-pean countries tens of them (Michie 2008). Each major city had a stockexchange, where local investors traded the shares of local companies. Thepopularisation of telegraph and the invention of telephone brought an endto the fragmentation of stock markets, as information relevant to stockprices could now be collected from far away and acted upon quickly. Aparallel trend was the growth of corporations, operating increasingly on anational and international scale. Consequently, in late nineteenth and earlytwentieth century local and regional stock exchanges were decimated in allbut very large economies. National stock markets were forged, with nationalindices and systems for the clearing and settlement of transactions (Frankset al. forthcoming). The period between 1900 and 1914 also witnessed asignificant market for cross-border stock transactions, primarily withinEurope and between Europe and North America, e.g. with British invest-ments in the US railway corporations.

The main function of the stock market is to establish the value ofcorporate shares. A large number of transactions, i.e. a high liquidity of astock market, contribute to the process of price discovery. Financial returnfrom holding shares consists of dividends and the appreciation of shareprice, i.e. capital gain (Solnik 1999). Thus, the estimation of a share pricerequires at the very least predictions about the future profitability of thefirm, which in turn involves guesswork about the future condition of theentire economy. There is no upper limit on a share price, while the bottomlimit is zero. This is why investments in stocks are risky, and in the long runshould be more profitable than relatively safe investments, such as govern-ment bonds. Between 1900 and 2000 the US stock markets, for example,have yielded an arithmetic average of 8.7% per year above inflation, withthe standard deviation of 20.2%, compared to US bonds with real returnsof 2.1% per year and standard deviation of 10% (Dimson et al. 2002). Asa corollary of high risk and high potential return stock markets are affected



by investor sentiment and irrational behaviour, resulting in a cycle of boomsand busts, with the bursting of the Internet boom in 2001 being a recentexample (Ferguson 2008; Shiller 2005).

Although the birth and development of stock markets have been facil-itated by legal inventions and the state, it was the Great Depression in theUSA, triggered by the stock market crash of 1929, which provided a mile-stone in the regulation of stock markets. As a part of New Deal, the Secu-rities and Exchange Act was passed in 1933, followed by the establishmentof the Securities and Exchange Commission in 1934, which introducedstrict entry requirements for companies willing to list their shares on stockexchanges, reporting duties for those listed, and a separation of investmentfrom universal banking in order to insulate the latter from the vagaries ofthe stock market. The US model of stock market regulation spread (thoughwith significant modifications) to many parts of the world. Many countriesused it as best practice, and Japan, for example, was persuaded to adopt itin late 1940s by the US military authorities (Braithwaite and Drahos 2000).Thus, while until 1930s stock exchanges operated largely as private clubsof traders, they emerged from 1940s as government controlled, semi-publicinstitutions, granted a near-monopoly on organising stock markets in theircountries (Michie 2008).

The world of national and monopolistic stock exchanges started to crumblein late 1970s, and since then we have witnessed a gradual globalisation ofstock markets. The rising multi-national enterprises have started listing onforeign exchanges to tap into new pools of capital and increase their visi-bility (Karolyi 2006). Institutional investors, including pension funds, havedeveloped a huge demand for and means to diversify their portfolios inter-nationally (Clark 2000). Stock exchanges themselves have been deregulated(though to various degrees in different countries), exposing them to inter-national competition. New technology has again been proven crucial, ascomputer networks have removed the necessity of traders meeting in oneplace, enabled an automatic processing of orders, and revolutionised inves-tors’ access to information. This has made virtual trading possible, and hasquestioned the raison d’être of stock exchanges. In response, many stockexchanges have become private publicly listed companies, engaged in inter-national mergers and alliances, and redefined themselves as IT businessesselling listing services to issuers and information services to investors (Budd1995; Lee 1998).

The globalisation of stock markets has also involved their regulation. Withcompanies issuing and listing shares, and investors trading on an increas-ingly international basis, the demand has arisen to coordinate various nationalrules on listing, disclosure and illegal trading practices, as well as to integrateclearing and settlement systems to ensure quick and inexpensive cross-borderpayments and transfers of share ownership. The International Organisationof Securities Commissions was established in 1983, and has been instru-mental in promoting the application of the International Financial Reporting



Standards (formerly known as International Accounting Standards) com-monly applied by firms around the world, and adopted as compulsory forlisted companies in the European Union in 2005 (Braithwaite and Drahos2000). Some steps have also been undertaken, particularly within the EU,towards the coordination of listing rules as well as clearing and settlement.To be sure, it is a heavily contested process. Stock market integration liesat the core of capital market integration, and opinions on the desiredextent and speed of this process differ between countries and stakeholders(Story and Walter 1997). We will return to this issue in the section onthe role of stock markets in economy and society, while the followingsection deals with the continued significance of geographical location instock markets.

Localisation of stock markets

The recent history of stock markets may appear as another chapter in afamiliar story of economic globalisation. This section will argue, however,that globalisation and apparent virtualisation of stock markets does not makelocation less important. This argument will be supported with evidencefocusing on the behaviour of issuers and investors.

The very fact that companies cross-list their shares abroad in order to tapinto foreign capital pools or increase their visibility suggests that nationalstock markets are far from integrated. According to the World Federationof Exchanges at the end of 2007 there were approximately 3300 cross-listings in the world, not to count thousands of firms with stocks tradedon foreign OTC markets. In choosing overseas listing venues, firms areaffected by distance and cultural proximity. While the US exchanges nearlymonopolise cross-listings from Americas, firms from India, South Africaor Australia cross-list mostly on the London Stock Exchange (Sarkissianand Schill 2004). It is also remarkable that trading in cross-listed firmstends to sticks stubbornly to the exchange in the home country (Hallinget al. 2007). When Nokia listed on the NYSE in mid-1990s, the lattercaptured 80% of its trading volume, but within a couple of years tradingreturned to the Helsinki Stock Exchange ( Jokivuolle and Lanne 2004).

Evidence on the continued significance of location can also be foundwhen analysing listing decisions within countries. Loughran and Schultz(2006) show that US firms from rural in relation to urban areas wait longerto list their shares on a stock exchange, are less likely to conduct equityofferings while listed, use lower quality intermediaries in IPOs, and havemore debt in their capital structure. Wójcik (2008a) extends these findings,demonstrating that firms from financial centres are more likely to go publicthan their provincial counterparts. This phenomenon, referred to as thefinancial centre bias, holds in an absolute majority of European countries,the USA and Japan. In the UK and France a large firm (with turnover ofat least €50 m in 2006) is 26% and 86% more likely to be listed if it is



headquartered in London or Paris, respectively. There are benefits of issuers’proximity to stock market intermediaries, investors and specialised labourmarkets found in financial centres. Listed companies require services ofinvestment bankers, auditors, lawyers, intensive relationships with institu-tional investors, and need to employ investor relations experts, accountantsand other professionals with skills specific to listed companies. Second, ifthe manager of a provincial firm going or being public is unsuccessful, she/he faces the threat of losing a job and possibly reputation in a small labourmarket and generally smaller social environment. Thus, the potential per-sonal cost of going public may be greater for provincial managers than forthose from financial centres.

In addition to issuers, geography has a profound impact on the behaviourand performance of investors. According to the Modern Portfolio Theory,the cornerstone of mainstream financial economics, investors should diversifytheir investments as widely as possible, moving towards a portfolio withstocks from individual countries held in proportion to their share in thetotal value of the global stock market (Sharpe 1970). In practice, bothindividual and institutional investors exhibit a preference for trading andholding of shares of domestic companies, known as ‘home bias’. In 2003,the US investors held more than 85% of their equity portfolio in domesticstocks, while the share of the US stock market in the world market wasapproximately 45% (Stulz 2005). In addition, investors are more likely tohold and trade foreign stocks from countries with which they have moreeconomic and cultural ties (Portes and Rey 2005). Research explaining‘home bias’ suggests that investors are not just more familiar with domesticcompanies, but proximity may afford them superior information about andbetter understanding of these companies. Shukla and van Inwegen (1995)find that UK mutual fund managers investing in the USA underperformrelative to their US colleagues.

‘Home bias’ has an equivalent within domestic stock markets, knownas ‘local bias’. There is mounting evidence that within countries, investorstend to trade and hold shares of companies that are headquartered closeto the location of investors in question. Coval and Moskowitz (1999) esti-mate that in the US approximately one in 10 companies in a fund manager’sportfolio is chosen because it is located in the same city as the manager.Ivkovic and Weisbrenner (2005) show that on average a US individualinvestor holds approximately 30% of his/her equity portfolio in the stocksof companies headquartered within 250 miles, while the share of such firmsin the total US stock market is on average only approximately 10%. InSweden Bodnaruk (2004) documents that when individuals move homethey sell stocks of companies from their old locations and buy those fromnew locations. ‘Local bias’ has also been documented for Finland, Germanyand China (for a summary see Wójcik 2009). In analogy with research on‘home bias’, it has been shown that investors can turn familiarity to theirown advantage by gaining superior information in relation to non-local



investors (Hau 2001). Local investors are more likely to have contact withemployees, managers and suppliers of the local firms; they may obtain rele-vant information from local media; they may use the company’s productsand services more frequently and be more able to judge their quality. Geo-graphical proximity may help to evaluate intangible factors affecting thestock price, such as management ability, corporate culture or local businessclimate (Gaspar and Massa 2007).

To be sure, investing domestically or close to home does not guaranteesuperior stock market returns. Far-away investors may lack local informa-tion, but may compensate for it with investment expertise, knowledge ofwhole corporate sectors, and the knowledge of non-local and global busi-ness conditions, all relevant to successful trading. Underscoring the signif-icance of investor sophistication, a review by Malloy (2005) states that inLatin America foreign equity analysts outperform local analysts; in Taiwanforeign analysts with a local research team outperform foreigners withoutlocal presence, but also outperform local analysts; while in Europe homecountry analysts typically outperform foreigners. It would be wrong, how-ever, to reduce secondary stock markets to a battle between local andnon-local investors. This picture would miss investors, and stock marketintermediaries, including stock analysts, consultants, underwriters, brokersand dealers that try to combine local with global information.

The relationship between issuers and investors is the centrepiece of stockmarkets, with a crucial geographical dimension to it (Lo and Grote 2002).The two groups benefit and are likely to continue to benefit from co-location, as it facilitates the conduct of transactions, exchange of informa-tion, and the use of a common pool of specialised labour. Together withstock market intermediaries the headquarters of issuers and institutionalinvestors form what could be termed ‘stock market centres’: national ones,focused on the links between domestic issuers and investors; and at a higherlevel international stock market centres, competing for the business ofinternational issuers and investors. To be sure, a stock market centre is nota necessary ingredient of any financial centre. There are financial centresbased on activities other than stock markets, for example Dublin withadministration and back-office of investment funds, Geneva with privatewealth management or Chicago with commodities and derivatives trading(Cassis 2006; Z/Yen 2009).

By their very nature, however, stock market centres are key buildingblocks of many, including the largest financial centres. First, issuers head-quartered in stock market centres generate demand for all types of finan-cial services. Second, stock market intermediaries, including investmentbanks, have expertise to meet this demand. Third, institutional investors,such as pension funds, represent the largest pools of money in the world(Clark 2000). Historical and contemporary competition between financialcentres highlights the significance of stock markets. Toronto, Sydney, andSão Paolo, winners of their domestic battles for financial primacy, are stock



market centres of their countries (Kindleberger 1974; Porteous 1999). Onthe international scene, witness how fiercely London and Paris competedfor European cross-listings in 1980s (Pagano and Roell 1990), London withNew York in 1990s and 2000s (McKinsey 2007), and the emerging com-petition for cross-listings in Asia.

Is a stock exchange a necessary ingredient of a successful stock marketcentre? This is a valid question, given that on an absolute majority ofexchanges (with a notable exception of the NYSE) physical trading floorhas been replaced with computers matching orders in virtual space (Laula-jainen 2003). The answer is no, if a stock exchange is defined as a companyfocused exclusively on providing computer servers and software for trading.In practice, however, the role of stock exchanges differs between countries.In Poland, for example, the Warsaw Stock Exchange plays an active part inencouraging companies to go public, and still provides a physical meetingplace for investors and issuers (Wójcik 2007b). If it ceased to perform thesefunctions, e.g. following a takeover by a foreign exchange, it is conceivablethat the primary stock market in Poland, particularly for small, local firms,could suffer (Grote 2007; Klagge and Martin 2005). Amsterdam, Brusselsand Lisbon already operate within Paris-headquartered Euronext exchange,but it remains to be seen how this will affect the future of financial sectorin these cities (Engelen 2007).

The role of stock markets in economy and society

The significance of stock markets extends far beyond the developmentof financial centres. The size and structure of stock markets have signifi-cant implications for the whole economy and society. There are strongdisagreements on the virtues and vices of stock markets between mainstream/orthodox economics and more socially oriented research in sociology,political science, geography and heterodox economics.

One characteristic of stock markets, commonly acclaimed by mainstreameconomists, is their impersonal nature in comparison with bank lending,as an alternative way of channelling capital from savers to firms. Bankerscan act in their own interest, at the expense of depositors’ interest, e.g.colluding with managers of borrowing firms. In other situations, bankscan exert too much power over borrowers, if the latter do not have anyalternative source of financing (Wenger and Kaserer 1998). Stock marketsbypass the intermediary, channelling funds to firms directly from the public.In addition, stock markets are seen as enhancing competition betweencompanies. Shares of companies that underperform can be acquired by com-petitors more easily if they are traded on a stock market. In general, actingimpersonally, stock markets are believed to be better than banks at applyingthe ‘axe’ of creative destruction. Banks, with established long-term rela-tionships with borrowers, are less likely to let them go bankrupt, even ifbankruptcy is justified (Rajan and Zingales 2003). Finally, stock markets



provide a forum where multiple opinions, both expert and non-expert,on firms and their decisions clash with each other, while in bank lendingsuch evaluations are made by few experts within one organisation. As such,it is argued, stock markets improve the allocation of capital and at the veryleast complement banks.

Another important way in which stock markets may outperform or atleast complement banks concerns innovation. It is claimed that banks havean inherent bias towards prudence, low-risk investments and borrowersthat offer tangible collateral to secure their loans (Morck and Nakamura1999). Young and innovative firms, with potentially highly profitable butvery risky projects, are therefore likely to struggle to obtain bank financing.Stock market investors would be more willing to fund such firms, sinceshares allow the provider of funds to participate in the success of the firmwithout an upper limit on their return (Wójcik 2008b). Thus, bank-centredfinancial systems may be more conducive to the funding of mature, lessrisky firms, while more market-based systems, more strongly support thegrowth of newer, riskier sectors (Levine 2004). Strong stock markets maytherefore enhance the innovativeness and competitiveness of an economy.Consider that the relatively high growth of the US economy in the 1990sand early 2000s, has often been associated with large and liquid stockmarkets, fed with hundreds of IPOs of high-technology companies. Euro-pean and other countries have tried to replicate this model (Posner 2005).

In contrast to orthodox economics, behavioural economics stresses therole of irrational behaviour in stock markets. Prices can rise or fall, evenfor years, without any changes in underlying fundamentals (e.g. in termsof corporate profitability) that would justify such price movements (Aker-lof and Shiller 2009). In other words, bubbles and crashes are common instock market history, and their effects on the distribution of wealth canbe tremendous. Those who bought shares towards the end of a bubble,presumably the most vulnerable, lower-income investors, lose most (Shiller2005). If considerable over- and underpricing are common on stock markets,and bursting bubbles lead to perverse distributional outcomes, this seriouslyundermines claims about the efficiency of stock markets as a mechanismallocating capital to firms, and a mechanism providing reliable investmentreturns on savings, including savings for retirement (Engelen 2003).

In addition to irrationality, stock markets may be subject to manipulation,with the main suspects including investment banks and corporate managers.Investment banks and investment banking departments of universal banksadvise firms on their stock market entry (IPOs) and other capital marketactivities, such as mergers and acquisitions, which gives them access tocorporate information, before other investors have it. On the other sideof their business, their investment advisors and analysts influence investors’opinions and decisions. This gives investment banks and bankers a positionof power in stock markets, which contributes to their very high profita-bility and legendary pay packages, and which they may abuse, e.g. by using



inside information when trading on their own account (Bodnaruk et al.2007; Crotty 2008).

Developed stock markets imply the preponderance of corporations witha multitude of small owners, none of which on their own can counter-balance the power of corporate managers. Since 1990s, in order to align theinterests of managers with those of shareholders, it has been popular toaward managers with stock options, which promise them big payouts if thestock price of the company goes up. Arguably, however, this may fixatemanagers’ interest on short-term stock market performance, and evenenhance incentives to manipulate accounting figures (Bebchuk and Fried2004; Froud et al. 2006). Corporate scandals at Enron, WorldCom or Ahold,where managers, investment bankers, and other intermediaries colludedwith each other, exemplify in an extreme fashion that stock market rela-tions are not as impersonal as orthodox economists paint them (Clark et al.2006). Even if we assume that stock markets genuinely discipline corpo-rate managers to maximise the value of shares, the ‘shareholder value’ orien-tation is in itself problematic, as it can undermine the interests of othercorporate stakeholders, such as labour and local communities (Lazonickand O’Sullivan 2000; Wójcik forthcoming). Takeovers, facilitated by stockmarkets, can further erode the power of labour and local communities, asthey result in abrupt closures and layoffs that may be socially harmful, whilebenefiting nobody but corporate raiders (Shleifer and Summers 1988).Indeed, financial economics has no conclusive evidence that hostile take-overs improve the performance of target firms (Becht et al. 2003). Thus,as the literature on financialisation stresses, stock markets may be seen asturning firms into commodities, things made for sale on the market, strippedof complex and locally embedded social relations that they represent(Aglietta and Reberioux 2005). On the investor side, growing exposureof households to stock market investments, either directly or via pensionfunds, may be seen as contributing to the rise of casino capitalism, wherewelfare provision is privatised, with individuals focusing on their ownrisky bets, and neglecting the need for social cooperation (Dore 2000; Halland Soskice 2001).

What is the verdict of empirical research on the relative virtues andvices of stock markets? One recent review states that there is no conclusiveevidence from cross-country studies that stock market-based or bank-basedfinancial systems are better at fostering growth. At the same time, it notesa tendency that national financial systems become more stock market basedas countries become richer (Levine 2004). To be sure the actual geographyof stock markets must not be simplified to the distinction between richand poor countries. Neither does it adhere to the stereotype of neo-liberalAnglo-Saxons versus the rest of the developed world. Table 1 is full ofemerging markets, some of which, judging by the number of listed firmsand the market capitalisation to GDP ratio, have larger stock markets thandeveloped economies. Japan and Switzerland have a higher ratio of stock



market capitalisation to GDP than the USA or the UK. The mosaic ofstock market influence goes deep – within Scandinavia stock market playsa small role in Denmark, but equity culture is well embedded in Sweden(Guiso et al. 2003). Moreover, research on Germany shows that the roleand structure of stock markets can differ even between regions of the samecountry (Clark and Wójcik 2007). History complicates the picture further.In 1913 Japan, Germany and France had arguably more developed stockmarkets than the USA (Rajan and Zingales 2003). One lesson from geo-graphy and history is that there is not one optimal structure for providingfinancial functions to the economy (Merton and Bodie 2004; Peck andTheodore 2007).

Conclusions

This paper has reviewed state-of-the-art research on the geographicalnature of stock markets. It shows that stock market actors and institutionsdo not just have to be somewhere, but where they are in relation to otheractors and institutions has an effect on their behaviour and performance.Hence, the geography of stock markets is crucial to the spatial distributionof financial services and centres. On another level, the evolution and struc-ture of stock markets involves a complex interplay of politics, technology,economy and culture, and can never be explained with economic modelsalone. Finally, stock markets do not just reflect economy and society, theyinfluence how economy and society work. It has been a partial review ofrelevant research, but hopefully, it has encouraged some readers to watchthis promising field and perhaps engage in it.

What can the current financial crisis tell us about stock markets, theirgeography, and their role in economy and society? To start with, it definitelyexposes bigger than ever interconnectedness of stock markets. Stock pricesin the USA, where the crisis originated, actually fell less than in Europe,Asia or Australia. From a normative perspective, some will argue that thecrisis underscores the virtues of stock markets in contrast to wholesale,non-regulated, opaque financial instruments, such as the mortgage backedsecurities or credit default swaps. In September and October 2008, whilethe financial system was melting down, media were following stock marketslike neutral, benign barometers of the economy, which could tell us whetherthe public regained confidence in banking and help us predict the degreeof coming recession. A more critical approach is in order. First, stock marketsdo not equal transparency. Consider, for example, the recent developmentof new alternative trading systems called ‘dark liquidity pools’, whereinstitutions can trade anonymously, beyond the reach of stock exchangelaws and regulations (Carrie 2008). Second, stock markets are central to boththe causes and effects of the crisis. What about executives’ rewards linkedto stock prices of their banks? Did not they exacerbate their short-term,risky and imprudent behaviour? What about retirement savings, channelled



to stock markets, which fuelled the stock market boom of the 1990s, buthave now gone up in smoke?

Future research should go beyond questions raised by the current crisis.One item for the research agenda stems from the observation that listedfirms, although plentiful, constitute only the tip of the corporate iceberg.There may be 2500 listed firms in the UK, but the total number of largefirms (defined by turnover of over €50 m) exceeds 35,000 (Wójcik 2007a).The question then is how does the influence of stock markets and ‘share-holder value ideology’ on corporate governance trickle down to other, non-listed firms in different national and regional contexts. Another item is theimpact of mergers and alliances between stock exchanges, such as NYSE-Euronext or Nasdaq-OMX, on the primary stock markets, and the geo-graphical distribution of stock market services. Can these events provedecisive in forging a new hierarchy and network of financial centres? Afinal, and perhaps most difficult question, involves the impact of stockmarket-based financial system on income distribution and poverty.

Short Biography

Dariusz Wójcik’s research focuses on economic geography, corporategovernance and finance; he has authored or co-authored papers in theseareas for The Journal of Economic Geography, Economic Geography, Annals ofthe Association of American Geographers, Environment and Planning A, RegionalStudies, and The International Encyclopedia of Human Geography. His bookco-authored with Gordon L. Clark The Geography of Finance (Oxford 2007)documents the emerging global market for corporate governance and itsimpact on the future of European economies. His research has been reportedin The Financial Times and The Financial News. Current research projectsconcern the future of global stock markets and financial centres, as wellas financial regulation and innovation. He is a Lecturer at the School ofGeography and the Environment, and Fellow of St. Peter’s CollegeOxford. Prior to this appointment he has lectured at the University CollegeLondon, and the London School of Economics and Political Science. Heholds an MSc in Geography from Jagiellonian University, and MSc inEconomics from the Cracow Academy of Economics, an MSc in Bankingand Finance from Stockholm University, and a PhD from Oxford University.

Note

* Correspondence address: Dariusz Wójcik, School of Geography and the Environment and St. Peter’sCollege Oxford, South Parks Road, Oxford OX1 3QY, UK. E-mail: [email protected].

References

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mailto:[email protected]



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