Stock Market Development Research Articles

The impact of foreign direct investment on stock market growth: Evidence from Pakistan

This paper aims to investigate the impact of foreign direct investment (FDI) on stock market growth in Pakistan from 1990 to 2020. The study aims to evaluate the impact of FDI on stock market growth in both the short and long term, as well as examine the impact of economic growth on stock market growth. The study uses an Autoregressive Distributed Lag (ARDL) model to analyze the long-term impacts of FDI on the stock market and an Error Correction Model (ECM) to evaluate the short-term impact. The study reveals a substantively significant and positive influence of Foreign Direct Investment (FDI) on the growth of the stock market, observed from both a short-term and long-term perspective. Gross National Income (GNI) and Exchange Rate (ER) also have a significant bearing on stock market growth, while Interest Rate (IR) is found to have a negative impact but is statistically insignificant. The findings also confirm the impact of economic growth on stock market development, establishing a triangular relationship between FDI, Economic Growth, and Stock Market Growth. The study concludes that FDI has a significant positive impact on stock market growth in Pakistan in both the short and long term. It further suggests that macroeconomic policies should be developed and a tax-free market environment should be created to stimulate and encourage foreign direct investment for economic growth and stock market growth. The study's policy implications suggest that government officials should implement viable macroeconomic policies and create a tax-free market environment to encourage foreign direct investment for economic and stock market growth in Pakistan.

Foreign Direct Investments and Stock Market Development in Sub-Saharan Africa: Does Regulatory Quality Moderate?

The association between foreign direct investment (FDI) and stock market development (SMD) is very crucial given the role of liquidity in the SMD process. However, this association can be affected by regulatory quality. Through the Calderon-Rossell model, this article explored the direct and conditional effects of FDI on SMD in five sub-Saharan African countries (Ghana, Mauritius, Namibia, Nigeria and South Africa) from 1996 to 2020. Regulatory quality was used as a moderator of the association between FDI and SMD. The pooled mean group strategy of the panel Auto Regressive Distributed Lag was implemented and findings suggested that FDI is positively and significantly related to SMD in the long-run. Furthermore, the conditional effect of regulatory quality on the association between FDI and SMD could not be established. This article has policy implications and contributed to the Calderon-Rossell model theoretical debate that liquidity improves SMD.

Stock market development and capital formation in selected African economies

PurposeThis study aims to explore the possibility that securities markets in selected African countries of Egypt, Kenya, Nigeria and South Africa play a significant role in capital accumulation using panel data analysis. This is done by exploring the relationship between gross fixed capital formation on the one hand and financial market development indicators on the other hand. Thus, the study aims to examine if stock market size and liquidity are determinants of capital accumulation.Design/methodology/approachThe analysis is based on annual times series from 1991 through 2017 spanning four African stock markets. The analysis utilizes the fixed-effect and random-effect econometric models. The Durbin–Wu–Hausman test is used to choose between the two models.FindingsThe key results indicate that stock market capitalization is a positive determinant of gross fixed capital formation. The market value traded and turnover have no relationship with capital formation. Therefore, the role of stock African stock markets in promoting capital accumulation and, subsequently, industrial growth in Africa is seriously questioned.Originality/valueOnly a handful of studies have examined the role of the African securities market in promoting capital accumulation. This study is unique in which it focuses on the leading stock markets in the four corners of Africa. The markets are from Egypt in the north, South Africa from the south, Nigeria from the west and Kenya from the east. These four markets account for a significant segment of all African markets.

Law and Stock Market Development in the UK over Time: An Uneasy Match

Abstract Britain has a reputation for having a stock market-oriented corporate economy and there is an extensive literature maintaining that laws affording substantial protection to outside investors are needed for a thriving stock market. Historically, however, UK equity markets have not always flourished and, when they have, law’s contribution has been open to question. This article considers the uneasy match between law and Britain’s stock market development from when shares first began to trade publicly through to the present day, offering in so doing insights into the relationship between law and equity markets and current reforms intended to revive a flagging UK stock exchange.

Drivers of Stock Market Development in Nigeria: Does Openness Matter?

The stock market represents a major source of long-term funds. However, the Nigerian stock market lacks depth due to the weak regulatory system and legal framework. Extant studies have shown that both institutional quality and openness are enablers of the stock market. An analysis of the effects of institutional quality and openness on the development of the Nigerian stock market from 1996 to 2021 is therefore crucial. The Auto Regressive Distributive Lag (ARDL) method is used to analyze data from World Bank databases and the Lane-Milesi Ferreti index, with results showing that institutional quality has a positive and significant impact on stock market development in Nigeria. Meanwhile, development of the stock market, institutional quality, and openness are related over the long term based on the ARDL bounds test. A further finding revealed that the development of Nigeria’s banking sector and the exchange rate had positive (negative) effects on the development of the stock market, respectively. Additionally, stock market liquidity contributed to development of the market. This study came to the conclusion that an enabling stock market in Nigeria could be strengthened by the interaction of institutional quality and openness. The study concludes that strengthening Nigeria’s governance institutions through the creation of an appropriate legal framework is necessary to ensure political stability and the absence of violence in the country’s political system. Besides, the government really needs to grant autonomy to agencies in charge of tackling corruption to enable them to enjoy simultaneous openness. Monetary authorities should also ensure exchange rate stability and improved credit for domestic investment activities.

Corruption and stock market development: Developing vs. developed economies

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.

Affiliation or non-affiliation: the impact of family-owned business groups on the Bogotá stock market, 1950-1980

This paper examines the impact of group affiliation on the development of Bogota’s stock market between 1950 and 1980. While the literature on business groups has discussed how they respond to market failures, little attention has been paid to the specific ways in which group affiliation affects stock market development in emerging economies. This study aims to fill this gap by analyzing panel data from Bogota’s stock market and implementing a series of correlated random effects panel regressions. The findings of this study demonstrate that group affiliation had a significant impact on the weighted market capitalization of stocks issued by listed companies. Specifically, high trading volumes were concentrated on a small subset of firms, suggesting that group-affiliated companies were able to capture the stock market as a means of financing their investments and increasing their product and geographic diversification. While the literature on business groups suggests that they typically arise in the absence of a developed capital market, our study reveals a different dynamic in the case of Colombia, where these groups advocated for the creation of the stock exchange. Hence, our findings challenge the misconception of inefficient and illiquid financial markets in emerging economies and shed new light on the role of business groups in driving financial market development.

Dynamic Threshold Effect of Financial Development on the Country Risks–Subsidies–Firm Performance Nexus: Evidence from Chinese Renewable Energy Firms

ABSTRACT Using multifaceted financial development indicators and a dynamic panel threshold model, this study finds that different regimes of financial development have different effects on Chinese renewable energy firm performance through the interactive channel of country risks and subsidies. A high level of composite financial development strengthens the positive interaction effect between composite risk and subsidies on renewable energy firm performance, and a high level of banking sector development and stock market development, respectively, weakens and strengthens the negative interaction effect between composite risk and subsidies on renewable energy firm performance. Further, these threshold effects of financial development on renewable energy firm performance are also different when using economic, political, and financial risk indicators, and they also change with different ownership attributes. Thus, the Chinese government needs to improve the level of composite financial development and create a stable composite risk environment to achieve fully the potential of subsidies in promoting renewable energy firm performance.

Historical Development of Frontier Stock Markets in Sub-Saharan Africa

Purpose: The purpose of this research is to review and compare the development of the three major frontier stock markets in Sub-Saharan Africa over time. The study provides some narrative around the historical development of each market as well as a theoretical backdrop for stock market development studies. Theoretical framework: The adaptive market hypothesis was used as the theoretical backdrop for the study. The adaptive market suggests that stock markets develop in an evolutionary manner (similar to natural selection). This evolution of stock market development is influenced by changes in investors’ behavior and regulatory standards. Design/methodology/approach: Data was collected from 1993 to 2020 on the IMF market efficiency score, the value of stocks traded, aggregate market capitalization, and the number of listed companies for the sample markets. The study used descriptive statistics and trend analysis to discuss and compare the stock market development indicators across the different selected frontier markets. Findings: The study discovered an improvement in stock market performance across the sample period. The Johannesburg Stock Exchange was found to be the most developed of the three stock exchanges. The Nigerian Stock Exchange was second while the Nairobi Stock Exchange was third. Some factors that erode the performance of these stock markets were also discussed. The practical and social implications: The sample stock markets are the major frontier markets, and so are often the first stop for foreign investors that want to penetrate the Sub-Saharan African markets. The performance of these markets often determines the level of foreign direct investment (FDI) and foreign portfolio investment (FPI) that flow into Africa. Originality/ Value: Few studies have investigated the performance of stock markets in Sub-Saharan Africa. Also, the few studies that investigate the performance of these markets rarely proceed to discuss the market-wide factors that erode the performance of these markets compared to those of developed economies. Some factors like the size of the economy, low financial literacy, misplaced government policies, poor investment culture, buy-and-hold-tight attitude, and high transaction costs were identified and discussed.

ВІДСУТНІСТЬ ФОНДОВОГО РИНКУ: ЧИ Є АЛЬТЕРНАТИВА EVA, EPS, P/E

The article proves that there is an urgent need to determine the key performance indicators of the company and to improve the methods of determining capitalization and profitability, for which accounting data is insufficient, because it ignores the costs of capital obtaining, the impact of changes in accounting policies, and the possibility of data manipulation. It was determined that in countries with a developed stock market, the performance of public companies is most often predicted through their share prices, return on assets (ROA), return on equity (ROE), earnings per share (EPS), return on invested capital (ROIC), return on investment (ROI), Economic Value Added (EVA), Economic Value Added Momentum (EVAM). It was found that Ukraine is a unique example of the disappearance in recent years of a stock market created from scratch in the 1990s; the causes of the problems hindering the development of the stock market of Ukraine are outlined. The essence and purpose of EVA, EPS, P/E indicators are considered in order to propose ways of their modification or replacement in the absence of a stock market. It has been proven that the market capitalization indicator cannot be used for non-joint-stock companies; and the main problem of determining EVA for a non-joint-stock company or in the absence of a stock market is determining the value of equity capital. Under such conditions, it is proposed to choose one of the classic approaches to the assessment of the value of capital - expense (Method of net assets, Method of probability of liquidation), income (Method of discounted dividends, Method of discounted cash flows), market (Method of multipliers, Method of deals, Method of industry ratios). It is also suggested to choose the Net Present Value (NPV) indicator for strategic management, because NPV maximization, even with negative EVA values, is sometimes a higher priority task than EVA maximization. But using NPV has the same problem as EVA using, it is choosing a discount rate. Various methods of calculating the value of equity capital are proposed: the capital asset valuation model (CARM); subjective assessment: interest on long-term government bonds or deposits; average profitability in the industry. Earnings per share (EPS) can be replaced by return on equity and even return on equity. With the ratio of the market value of the share to the net earnings per share (P/E), it is much more difficult, because the calculation of the market value under such conditions is not available. It is noted that the types of enterprises, which are usually public and private, differ. For example, despite being small in their early stages, technology firms typically go public. Smaller companies tend to experience a greater negative impact from higher interest rates and inflation. It is concluded that all indicators should be treated with skepticism and used only as tools, not as drivers, and other factors should also be taken into account during the holistic assessment of investments: dividends, projected future profits, corporate culture, social responsibility of the company.

EXAMINING MACROECONOMIC FACTORS & CAPITAL STRUCTURE CHOICES IN PAKISTAN'S MANUFACTURING INDUSTRY: AN EMPIRICAL ANALYSIS

A company's financing choice is the influenced by both internal and external factors, with empirical research typically focusing more upon internal factors and less upon macroeconomic variables, mainly in emerging countries. This study aims to examine the macroeconomic factors that affect capital structure decisions in manufacturing industry in Pakistan, using data from the past decade (2012-2022). Study uses many models, including POLS, fixed effect, random effect and Hausman test, to analyze impact of macroeconomic factors on capital structure choices of listed manufacturing firms in Pakistan. Results indicate that GDP growth rate, corporate tax, and interest rate have negative link with financial leverage, but exchange rates, stock market development and public debt have a positive association with financial leverage. Study acmes upright of macroeconomic variables in evolving manufacturing sector in Pakistan, about stock market development, corporate taxes, & exchange rates. This study be useful for shareholders in determining proper investment and financing sources, and for financial leaders in determining the optimal level of capital structure.

Digitalization and development of the Russian stock market: impact of household consumption

In developed economies the opportunities of the stock market are widely used to solve practical issues of financial security of the economy. The advantage of financial provision of the economy at the expense of the possibilities of the stock market in com parison with the so-called bank financing is obvious. This topic takes a special urgency for rather young market economy of Russia. Household savings occupy a special place in the implementation of investment activities. In the most developed countries, the population is traditionally regarded as the leading provider of financial resources for the national economy. What indicators and factors are need to be managed to achieve sustainable development of the domestic stock market in the era of digitalization? How are consumption and the stock market related? This paper will build an econometric model to help answer these two questions.

Перспективні напрями розвитку фондового ринку України з урахуванням сучасних тенденцій

Introduction. The recovery of Ukraine's economy in the war and post-war periods is impossible without rebuilding the modern institutional structure of the financial sector, in which the leading place will be occupied by the domestic stock market. Problem Statement. Taking into account the fact that the stock market of Ukraine is not formed and does not correspond in most parameters to other countries of the Eastern European region, it is advisable to consider its features in more detail and propose more effective reforms in this area. Purpose. To identify the key problems that led to the decline of the domestic stock market, analyze the best practices and successful approaches to the development of securities markets in the world, as well as formulate proposals for the reconstruction of a more modern and efficient market in Ukraine. Methods. Theoretical and methodological basis of the research is scientific works of foreign and Ukrainian scientists, modern statistical information base of the stock exchanges. The study of problems and approaches related to the peculiarities of the development of the Ukrainian stock market was carried out using the methods of critical and scientific analysis, comparative analysis, scientific generalization and systematization, induction and deduction. Results. The development of the stock market in the context of digitalization opens up significant opportunities for a more innovative and rapid renewal of Ukraine. But the essential problems of the domestic stock market remain: 1) non-performance of the basic functions that are typical for other countries; especially the asset pricing function; 2) insecurity of the rights of citizens of Ukraine on the stock market; 3) lack of corporate efficiency and clear specialized vertical integration of large Ukrainian enterprises; 4) payment of dividends only to the majority shareholders, the state and manipulation with them. Conclusions. Modern developed stock markets of the world have a significant potential in the context of the development of both traditional and digital economies, so there is an urgent need to modernize the domestic stock market. At the same time, the development of the stock market will have great prospects if the infrastructure is significantly improved, the ownership of assets in Ukraine is respected, and the corporate sector respects the public interest.

Financial deepening and equity investment in emerging markets

The aim of this study is to examine the effect of financial deepening on stock market development using equity investment. There is an increasing need for financial service expansion to improve equity investment, which will lead to better stock market operations. We identify the key financial deepening mechanisms in this study, such as broad money supply, credit to the private sector, and economic progress, and we use inflation as a moderating tool. The study spans the years 1981 through 2021. Because of the unit root result, we believe that the autoregressive distributed lag (ARDL) model and error correction model (ECM) are the most appropriate techniques for producing the most reliable results. The study's findings show that, in both the long and short runs, GDP has a positive impact on equity investment, implying that an improvement in the general economic situation can have a positive impact on equity investment. Similarly, in the short run, broad money supply has a positive and significant influence on equity investment, but not in the long run. Credit to the private sector, on the other hand, has a material negative effect on stock market development in the short run and becomes insignificant in the long run. These findings suggest that the government should pay closer attention to financial deepening indicators in order to improve equity investment, which is a major component of stock market capitalization. In line with the results, the government should make more funds available for private sector activities while also maintaining a stable money supply to meet economic demands.

Financial integration and earnings management: evidence from emerging markets

PurposeThis study examines whether country-level financial integration affects firms' accounting choices and the quality of financial information.Design/methodology/approachThis study employs Propensity Score Matching (PSM), and panel regressions of a large sample of data from 20 emerging markets over the period 1987–2018.FindingsThis study finds evidence that increased level of financial integration is significantly positively associated with firms' accruals earnings management (AEM) and real earnings management (REM).Research limitations/implicationsFindings in the study have implications for standard-setting bodies that aim to enhance the usefulness of financial reporting quality. The study also has implications for various initiatives by governments in emerging markets aimed at raising investor confidence and fostering stock market development through greater financial integration.Practical implicationsFindings in the study have implications for standard-setting bodies that aim to enhance the usefulness and quality of financial reporting. The findings can be of interest to analysts, auditors and other monitoring institutions who play a crucial role in detecting earnings management and reducing information asymmetry. Finally, the study has implications for various initiatives by governments in emerging markets aimed at raising investor confidence and fostering stock market development through greater financial integration.Originality/valueFindings in the study reveal how country-level financial integration affects accruals and real earnings management in a sample of firms from 20 emerging markets. Further, the study adds to the growing body of literature on emerging markets where capital markets mechanisms, regulatory environment and firm's corporate governance are distinct to developed markets.

Does Capital Structure, Profitability, and Dividend Policy Improve Stock Prices?

Purpose: The aim of this study is to investigate how capital structure, profitability, and dividend policy impact the stock prices of companies in the consumer goods manufacturing industry sector listed on the Indonesia Stock Exchange from 2018 to 2020 Theoretical framework: The theoretical framework is based on agency theory and financial management. It focuses on the relationship between financial structure, profitability, dividend policy, and stock prices. Financial structure is measured by the debt-to-equity ratio, profitability by return on assets, and dividend policy by the dividend payout ratio. The framework highlights the fundamental factors that affect a company's financial performance, which in turn influence its stock price. Design/methodology/approach: The data utilized for this research is quantitative in nature, consisting of financial ratios and approached descriptively. Descriptive statistics and panel data regression analysis were employed for data analysis with the aid of the Eviews 12 Student version application. Findings: The Results of the research indicate that capital structure, profitability, and dividend policy have a simultaneous impact on the closing price of stocks. Partially, the debt-to-equity ratio, which proxies for capital structure, has a significant and negative effect on the stock price. However, return on assets, which proxies for profitability, does not seem to have any influence on the stock price. Moreover, the dividend payout ratio, which proxies for dividend policy, also does not seem to have an impact on the stock price. Research, Practical & Social implications: The findings can be used as a basis for further research on the impact of other financial factors on stock price. Investors can use the results to make investment decisions, such as adjusting their portfolio based on the capital structure and dividend policies of the company. The study contributes to the development of the Indonesian stock market by providing insights for investors, analysts, and companies on the factors that affect the stock price Originality/value: The emphasis on the importance of considering not only financial ratios but also external factors when making investment decisions. It highlights the need for companies to maintain good financial performance and keep their DER ratio under control to maintain investor confidence and ensure financial stability.

Research On the Impact of Margin Trading on The Stock Idiosyncratic Volatility

In classical asset pricing model, expected stock return is only determined by systematic risk, and idiosyncratic risk can be completely dispersed without asset pricing effect. However, the real world and the assumptions of classical asset pricing model are different, as idiosyncratic risk cannot be completely dispersed and has pricing effect. Recent studies found that the stock idiosyncratic volatility can actually predict stock return negatively, indicating the existence of the " Idiosyncratic volatility puzzle" in the Chinese stock market. There are constraints on margin trading in the Chinese stock market, which can affect investors' investment behavior and expectation of stock return. This article adopts difference-in-differences model and multivariable linear regression mode to test the impact of margin trading on idiosyncratic volatility, and further investigate the impact of margin trading on the " Idiosyncratic volatility puzzle ". The research results found that: In the process from the establishment of the margin trading system to the gradual expansion of underlying stocks, the impact of margin trading on idiosyncratic volatility has shifted from a positive impact to a negative impact. That is to say, margin trading has transitioned from initially increasing idiosyncratic volatility to later reducing idiosyncratic volatility, gradually playing a role in price discovery and reducing idiosyncratic risk in the stock market. The gradual improvement of the margin trading system is driving the development and maturity of the Chinese stock market.

Impact of government integrity and corruption on sustainable stock market development: linear and nonlinear evidence from Pakistan

Impact of government integrity and corruption on sustainable stock market development: linear and nonlinear evidence from Pakistan

Islamic financial development & economic growth: the emergence of Islamic financial market in Pakistan

PurposeThe impact of Islamic finance on economic growth is an ongoing debate. The purpose of this study is to empirically evaluate how the development of Islamic finance affects the long- and short-run economic growth of Pakistan.Design/methodology/approachThe institutional variables, Islamic banking development (IBD), Islamic bond market development (IBM) and Islamic stock market development (ISM), are considered as measures of Islamic financial development, and real gross domestic product (GDP) is taken as measurement proxy of economic growth. The quarter time series data from Q1:2006 to Q4:2021 is analyzed through Autoregressive distributed lag model, Bounds test, ECM and Pairwise granger causality test.FindingsThe findings of this study indicate that in the long run, there is a significant and positive correlation between IBD and ISM with the real GDP, though ISM negatively cointegrated with real GDP in the short run. In contrast, IBM and real GDP did not find cointegrated in the long run, though the relationship is significant but negative in the short run.Practical implicationsThe findings highlight Islamic financial development in Pakistan can contribute to the country's economic development, and this can be achieved by improving the infrastructure, increasing skilled professionals, creating a favorable legal environment and ensuring financial sector stability. Investors can diversify their investments and mitigate risk by adding Islamic financial instruments to their portfolios.Originality/valueThis pioneering study simultaneously measures the cause and effect relationship between Islamic financial development indicators (Islamic banking, Islamic bond and Islamic stock) and economic growth in Pakistan.

Do the Macroeconomic Forces Affect Stock Market Development? An Empirical Investigation from G-10 Economies

Do the Macroeconomic Forces Affect Stock Market Development? An Empirical Investigation from G-10 Economies