Determinants Of Stock Market Development In Emerging Countries

The prime motivation behind this research endeavor is the increased importance of the emerging markets in the global financial arena.In the context of international investors,the capital markets of the emerging economies are not only substantial asset classes,but they are now one of the vital sources of foreign capital for these countries.Keeping the enormous growth on behalf of the emerging economies in mind two questions arise in one's mind: What is the contribution of the stock market to the economic growth of a country? What are the underlying factors that are accountable for such an outstanding expansion of stock markets in emerging countries? In the literature,the first question has gained significant attention whereas;attempts have been made to answer the second question.In this regard,various macroeconomic and institutional factors such as income,savings,banking sector development,foreign investment,inflation,corruption,and law &order,etc.,have been identified to be the most important factors responsible for the growth of stock markets in emerging countries.However,the literature has escaped other vital formal and informal institutional factors which can have marked impact on the development of stock market especially in the context of emerging countries.This research endeavor aims to explore determinants of stock market development in emerging countries(1)for the period 2009-2016.The central argument of this dissertation is that the institutional arrangements which ensure the stability and predictability of policy environment are very vital on behalf of stock market development in emerging economies.Apart from liberalization,the institutional setting of countries propagates essential cues to the market actors about how much the government's policy commitments are durable.I have utilized stock market capitalization which gauges the stock market development as an outcome variable whereas;the formal institutional variables of my interest include;financial freedom,property rights,government regulations and IFRS uniformity being previously unexplored in the literature.In this dissertation,I further posit that beside formal institutions stock market is also affected by informal institutions or behavioral elements such as cultural traits(individualism and uncertainty avoidance)and social values like trust which have also been ignored in the extant literature.In the wake of recent corporate scandals,majority of the people including people in business and politicians perceive the stock markets as casinos;they have lost confidence while investing in stock markets.Despite this scenario,the role of trust has not been explored so far in finance literature to predict stock market participation and development.This dissertation has attempted to fill this void and claims that trust is a very vital behavior element which encourages investment in the stock exchange.Other conventional variables of stock market development were used as control variables.For accomplishing this purpose,I have utilized pooled OLS as well as a more robust methodology of the dynamic panel data models that is,the generalized method of moments(GMM).The outcome of this research endeavor found a significant positive association of financial freedom,property rights,government regulations,IFRS uniformity,and trust with the stock market development whereas,Individualism and uncertainty have been noticed to have a significant negative impact over the growth of emerging stock markets.This dissertation concludes that both formal and informal institutions are critical for the development of emerging stock markets.Financial freedom,stable government regulations,provision of protection to investors,IFRS uniformity and higher trust level among citizens enhance the breadth,depth,and efficiency of stock market whereas,individualism and uncertainty avoidance hamper the growth of stock market development in emerging countries.The participants of the stock market can take benefits by studying these institutional elements profoundly and make their decisions accordingly.The stock market in many aspects is a creative mechanism.The transition from relatively weaker towards robust market system requires nurturing of the institutions as well as fine tuning of the regulations as the system evolves.Effective policies shall be crafted in such a way which shall incorporate the changes brought by formal and informal institutions.