Democracy and Stock Market Development: The African Experience

Abstract

This study takes a broad approach to the relationship between political risk resolution through democracy and stock market development. Specifically, it examines the empirical relationship between the degree of democracy (ranging from non-democracies or autocracies to well-established “mature” democracies) and stock market size and liquidity. Using the random effects Generalized Least Squares methodology on a sample of 22 African countries and spanning the period 1985–2011, this study finds (i) the greater the degree of democracy, the greater the liquidity of the stock market but the impact on the size of the market is insignificant; (ii) the relationship between military leadership and stock market development is statistically insignificant; (iii) having constitutional limits on the number of years a chief executive is allowed to serve promotes stock market development; and (iv) a higher degree of political competitiveness has a significantly positive impact on both stock market size and liquidity.

Citation

Biswas, R. and Ofori, E. (2015), "Democracy and Stock Market Development: The African Experience", Overlaps of Private Sector with Public Sector around the Globe (Research in Finance, Vol. 31), Emerald Group Publishing Limited, Leeds, pp. 65-86. https://doi.org/10.1108/S0196-382120150000031003