Political regimes and stock market development

Abstract

This article highlights an often overlooked element in the finance-growth nexus: the role of political regimes. We find political regimes to impact the size of security markets but not the degree of liquidity; there is no statistically significant difference in the volume of shares traded on stock markets between autocracies and the rest of the sample. We find strong support for Rodrik and Wacziarg’s (Am Econ Rev Papers Proc 95:50–55, 2005) finding that democratic transitions do lead to positive economic outcomes. Though the link between a young democracy on financial development is negative over the period 1990 to 1999, the relationship turns positive from 2000 to 2009, indicating that as democracies mature there is less uncertainty toward investment. This finding is contrary to the perception that a new democracy is likely to function like the typical autocrat. In essence, the effect of democracy on financial development is J-shaped. The data also reveal that military leadership has a negative effect on financial development.