Corruption and stock market development: Developing vs. developed economies

Abstract

This paper looks at the impact of corruption on stock market development, emphasizing the difference between developing and developed economies and the role corruption may play in preventing firms from listing. Guided by a theoretical model that explains why corruption’s impact on stock market development may differ, we use a sample of 87 economies worldwide over the period 1995–2017 to test for that difference. For the full sample we find no evidence that corruption has a significant effect on stock market development, but this changes when we split the sample into two groups: high-income and low-income countries. For the subsample of poorer (developing) countries, the corruption-stock market development relationship remains insignificant or weak. For the subsample of high-income (developed) countries, however, we find a significant relationship between lower levels of corruption and stock market capitalization as a share of gross domestic product. Our results further indicate that higher levels of income and investment reduce the impact of that relationship. Our results are robust to alternative estimation specifications and confirm the importance of macroeconomic fundamentals (i.e., income, investment, domestic credit, and macroeconomic stability) for the development of stock markets. In particular, those fundamentals seem more important for developing economies before reduced corruption will have as much (if any) of an impact.