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The purpose of this paper is to investigate whether foreign direct investment (FDI) can stimulate financial development in countries with corrupt dominant élites. Financial markets have not been expanded in many developing countries despite their proven positive effect on economic growth. Although three voluminous and parallel lines of research investigate the impact of financial markets, FDI, and political corruption on economic growth, no research up to now has examined the combined effect of foreign investment and corruption on financial development.

To investigate the causal links, a multivariate Error Correction Model (ECM) is applied on a sample of 22 developing countries, over the period of 1976‐2003.

Overall, the study provides some preliminary evidence that FDI may jump‐start financial development in developing countries. Furthermore, the results indicate that most of the causal links are found in developing countries which experience a higher level of corruption in the form of excessive patronage, nepotism, job reservations, “favor‐for‐favors”, secret party funding, and suspiciously close ties between politics and business.

The study, however, does not provide any evidence that FDI can reduce political corruption. Much additional theoretical and empirical research is needed to explore whether FDI can influence political and economic traditions and stimulate financial markets.

The study is the first empirical attempt to examine the causal link between FDI and financial markets in interaction with political corruption.

The purpose of this paper is to compare and contrast the effect of individual and institutional sentiments on the US stock returns during a prolonged bull phase of ten years in the 1990s compared to shorter boom and bust cycles of the 2000s. The study is focussed on a set of stocks that are prone to sentiments and speculations.

To compare the dynamic interaction of individual and institutional sentiments and stock returns, the authors use the vector autoregression (VAR) approach. The VAR model has proven to be especially useful for describing the dynamic behavior of economic and financial time series because it does not impose a priori restriction on the structure of the system. Using impulse response function, the authors determine how stock returns respond over time to a shock in institutional and individual sentiments.

The authors find that sentiments of individual investors can affect returns mostly when there is a prolonged upward trend in stock prices, while sentiments of institutional investors can impact the returns when stock market is more volatile.

This paper compares the effect of noise traders and rational investors’ sentiment on stock returns during the persistent period of positive abnormal returns of the 1990s and the more volatile stock returns of the 2000s.