Analyzing factors shaping stock market development and regulation in emerging markets: Exchange rates, industrialization, press freedom, and capital flight

Abstract

The research delved into the determinants of stock market development across nine Southern African Development Community (SADC) nations. The study employed seemingly unrelated regression (SUR) and system generalized methods of moments (SGMM) for comprehensive analysis. By building upon the research conducted by Bala and Hassan (2018) and Nyasha and Odhiambo (2020), this study applied El-Wassal’s (2013) four-factor framework to investigate the impact of capital flight, exchange rate regimes, industrialization, and press freedom on the development of the stock markets. Press freedom was identified as a catalyst for enlarging and enhancing liquidity in the stock market. Conversely, industrialization exhibited a negative impact on market size, while capital flight adversely affected market development, size, and liquidity. The study revealed that the pegged, crawling, and managed exchange rate regimes positively influenced stock market growth and capitalization while a floating exchange rate system detrimentally affected the same. This paper contributes to the extant body of theory and educates policymakers in the region regarding the criticality of selecting regimes that facilitate stable exchange rates, support unrestricted press, encourage industrialization, and mitigate capital flight.