Conventional wisdom holds that pension reforms from pay-as-you-go to fully funded systems spur the development of stock markets through a corporate governance channel, i.e. pension funds become large shareholders of publicly traded firms and therefore have the incentives to monitor managers and improve investor protections. This paper reviews the literature on the corporate governance channel associated with pension reforms in developing countries, and asks what we know and need to know about it. We know that pension funds are not yet large shareholders of publicly traded firms in developing countries. However, econometric results suggest that pension reforms lead to stock market development, but do not allow us to identify and separate the corporate governance channel. We know that pension reforms are followed by pro-investor legislation, but there is no convincing evidence that the pro-investor laws are enforced. We need to know more about the effects of pension reform on stock prices and performance of publicly traded firms, and whether pension fund management companies act in the best interest of pensioners. The paper also reviews the political economy explanations of the links between pension fund specific capital controls and the corporate governance channel, and suggests that there is a trade-off between the objectives of pensioners' welfare maximization, and corporate governance reform and stock market development.The largest institutional investors, the group that includes the largest collection of investment capital in the world, are the pension funds. One of the most important elements to understanding the current state of corporate governance, as well as its future direction and potential, is an understanding of this group. (Robert Monks and Nell Minow, Watching the Watchers : Corporate Governance for the 21st Century).

findings Catalan, Impavido, and Musalem study the relationship Africa, and Thailand. They do not present a theoretical between the development of contractual savings (assets framework but do explain how the growth of the of pension funds and life insurance companies) and non-contractual savings sector is thought to promote financial life insurance and the development of stock markets development. (market capitalization and value traded). TheirThe authors find evidence in the data that causality contribution lies in providing time-series evidence on a between institutions and markets either does not exist or, hypothesis that is very popular-but had not been if it exists, runs predominantly from institutions to substantiated-among supporters of fully funded pension markets. To a lesser extent, there is simultaneous systems in which funds invest large shares of their causality between institutions and markets. Furthermore, portfolios in tradable securities (equities, bonds).there is limited evidence that causality runs only from The literature is not clear on its assumption regarding markets to institutions (the only exception seems to be causality between contractual savings and capital market for non-life insurance in developing countries). development. A one-way or two-way relationship is Results seem to support the idea that the development assumed, usually interchangeably; the authors address of institutional investors is likely to promote the growth the question of which leads empirically. They present of market capitalization more than that of value traded. the evidence, including descriptive statistics and the In developing countries, there seems to be no causality results of Granger causality tests, for OECD countries from pension funds to growth in value traded, while and such countries as Chile, Malaysia, Singapore, South there is causality from life and non-life insurance.This paper-a product of the Financial Sector Development Department-is part of a larger effort in the department to study the effects of contractual savings on financial markets. Copies of the paper are available free from the World Bank,

This paper studies the transmission of bank capital shocks to loan supply in Indonesia. A series of theoretically founded dynamic panel data models are estimated and find nonlinear effects of capital on loan growth: the response of weaker banks to changes in their capital positions is larger than that of stronger banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the financial system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks' starting capital positions and the size of capital injections.

Catalan, Impavido, and Musalem study the relationship Africa, and Thailand. They do not present a theoretical between the development of contractual savings (assets framework but do explain how the growth of the of pension funds and life insurance companies) and non-contractual savings sector is thought to promote financial life insurance and the development of stock markets development. (market capitalization and value traded). TheirThe authors find evidence in the data that causality contribution lies in providing time-series evidence on a between institutions and markets either does not exist or, hypothesis that is very popular-but had not been if it exists, runs predominantly from institutions to substantiated-among supporters of fully funded pension markets. To a lesser extent, there is simultaneous systems in which funds invest large shares of their causality between institutions and markets. Furthermore, portfolios in tradable securities (equities, bonds).there is limited evidence that causality runs only from The literature is not clear on its assumption regarding markets to institutions (the only exception seems to be causality between contractual savings and capital market for non-life insurance in developing countries). development. A one-way or two-way relationship isResults seem to support the idea that the development assumed, usually interchangeably; the authors address of institutional investors is likely to promote the growth the question of which leads empirically. They present of market capitalization more than that of value traded. the evidence, including descriptive statistics and the In developing countries, there seems to be no causality results of Granger causality tests, for OECD countries from pension funds to growth in value traded, while and such countries as Chile, Malaysia, Singapore, South there is causality from life and non-life insurance.This paper-a product of the Financial Sector Development Department-is part of a larger effort in the department to study the effects of contractual savings on financial markets. Copies of the paper are available free from the World Bank,

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