Stock market liberalization: implications on cost of capital in emerging Islamic countries

Bilal İlhan

doi:10.1108/jcms-08-2019-0040

Abstract

PurposeMost of the major Islamic countries’ stock exchanges have not been able to perform at the same pace with the major emerging countries’ stock exchanges since the mid of 1990s. The purpose of this paper is to examine the implications of stock market liberalization on cost of capital as one of the crucial driver to stock market development and physical investment growth in emerging Islamic countries.Design/methodology/approachThis study employs static panel data techniques on the sample of seven emerging Islamic countries over the years 1989-2008.FindingsThe findings of this study suggest that stock market liberalization significantly reduces cost of capital in the stock markets of sample Islamic countries, which carries policy-oriented implications. Reduction in the cost of capital increases the number of exchange-traded companies, profitability of projects and aggregate investment level; therefore, the study findings are highly concerned by the economic policymakers, corporations and investors alike.Research limitations/implicationsIn the literature, different proxies are employed to measure stock market liberalization and cost of capital as well. Due to data limitations, this study could not employ different proxies for both, especially for stock market liberalization, for robustness purpose. That limitation further restricted the coverage of Islamic stock markets and time period. Therefore, generalization of the study results for overall Islamic stock markets can be slightly drawn.Originality/valueThe paper provides further understanding regarding the effects of SML on cost of capital, thereby indirectly on the stock market development, in the context of EIC.

Highlights

1.1 Context and background Financial liberalization became an essential economic policy in order to transform the economic structure of developing countries into a state where both private sector and developed financial markets are the main drivers of the economic growth since the 1980s (Bekaert et al, 2005)
The significant negative coefficients of sml variable at very high level, i.e. 1 percent, were hold during the 2000s. These results suggest that SML became a significant factor which consistently reduced the cost of capital in the stock markets of emerging Islamic countries (EIC) during 2000s compared to 1990s
This study aims at analyzing the possible effects of SML on cost of capital, as one of the crucial economic policy for stock market development and economic growth, in the stock markets of EIC

Summary

Introduction

1.1 Context and background Financial liberalization became an essential economic policy in order to transform the economic structure of developing countries into a state where both private sector and developed financial markets are the main drivers of the economic growth since the 1980s (Bekaert et al, 2005). The proponents of SML have advocated that it has positive implications on the economic growth, i.e. an increase in the GDP growth and private investment growth (Henry, 2000a, b; Bekaert et al, 2003, 2005); stock market development, i.e. an increase in the market capitalization and liquidity Published in Journal of Capital Markets Studies. Anyone Journal of Capital Markets Studies may reproduce, distribute, translate and create derivative works of this article

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Results

Conclusion