When Institutional Plates Collide: The Dynamic Impact of Informal Institutions on Capital Market Development

We provide an institutional theory perspective to examine societal legitimacy in the context of capital market development. While prior research has focused on the importance of formal institutions, firms are embedded within broader socio-economic structures associated with informal institutions. Using content analysis and a unique dataset of 3244 newspaper articles between 2004 and 2013, we develop a dynamic measure capturing the public perception of capital markets as a proxy of informal institutions. We run a Prais–Winsten regression with panel-corrected standard errors to explore the dynamic relationship between public perception of capital markets and equity market size in Austria and Poland. We further theoretically and empirically explore how formal and informal institutions mutually reinforce each other in the context of capital market development. Our results suggest that informal institutions matter differently in developed and emerging economies.