Abstract
While the link between stock market development and overall economic growth is well discussed, the empirical evidence on what motivates the development of stock markets is still scanty necessitating further research efforts. In this study, how institutional quality affects stock market development in Ghana is examined relying on quarterly data spanning from 1995Q1-2015Q4 using a composite index of stock market development. Applying the Autoregressive Distributed Lag (ARDL) method, the results posit a significant short and long-run effect of institutional quality on stock market development. Controlling for macroeconomic factors, a long-term significant impact of foreign direct investment inflows, banking sector growth, and income level on the growth of Ghana’s stock market is observed. It is further documented that regardless of the time period, domestic macroeconomic instability proxied by inflation does not matter for stock market growth. According to the main findings, it is recommended in the study that continual efforts must be made to enhance the quality of institutions. Particularly, policies geared towards improving regulatory quality and control of corruption are imperative for reducing unethical practices in the stock market.
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