Effect of Market Capitalization on Economic Growth of East African Community

Ruth Kaiboi ,Symon Kiprop ,Aquilars Kalio

doi:10.7176/jesd/12-10-05

Abstract

Stock markets in developing nations are faced with various constraints such as thin trading, liquidity issues and lack of developed investor base. Most stock markets in Africa are dominated by a single Industry as the backbone of the economy. Therefore, the main aim of this study was to establish effect of market capitalization on economic growth of east African community. The study was guided by Financial Intermediary theory. This study adopted causal research design. Data were obtained from: capital markets, Stock Exchanges (USE NSE, RSE and DSE) of the EAC member countries, annual Statistical report from the EAC website and World Bank as well. Analysis of the data was done using descriptive and inferential statistics. This study adopted a Panel Vector Autoregressive (Panel VAR) model. The results of this study indicated that stock market performance variables have a long run positive effect on the economic growth in the EAC and a bi-directional causality between market capitalization. Therefore, this research is beneficial to East Africa Securities Regulatory Authority (EASRA) in designing of policies that creates favorable business environment for stock markets to flourish. The study recommends that the EAC member governments should pursue policies that can contribute to increased liquidity as this would in turn lead to a higher stock turnover rate. Keywords: Capitalization, Market, Economic Growth, East Africa Community. DOI: 10.7176/JESD/12-10-05 Publication date: May 31 st 2021

Highlights

Background of the studyFinancial systems play a critical role in contributing to efficient and a prosperous economic wellbeing of a country
The findings showed that an increase in stock market capitalization by a marginal average of 10% stimulates an increase in growth by 5.4% going by the study
Conclusion of the study The first objective aimed to investigate the effect of market capitalization on economic growth of east African community

Summary

Introduction

Financial systems play a critical role in contributing to efficient and a prosperous economic wellbeing of a country. It helps in mobilizing and pooling resources that are diverted towards gainful capital, stimulating economic growth. Market performance refers to a measure of stock market as an entirety or of a specific stock It acts as a measure of economic performance in a manner which helps in distribution of the necessary capital required for the harmonization of growth in an economy (Osho, 2014). The stock market’s major role is to act as a financial institution This improves the feasibility of capital formation and distribution, empower corporations and governments to expand long-lasting investment for financing new projects and inflate other operations (Shahbaz, Bhattacharya & Mahalik, 2018)

Objectives

Methods

Conclusion