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Democracy and Stock Market Performance in African Countries

By Simplice A. Asongu

Abstract

Purpose \u96 This paper assesses the incidence of political institutions on stock market performance dynamics in Africa. Design/methodology/approach \u96 The estimation technique used is a Two-Stage-Least Squares Instrumental Variable methodology. Channels of democracy, polity and autocracy are instrumented with legal-origins, religious-legacies, income-levels and press-freedom qualities to account for stock market performance dynamics of capitalization, value traded, turnover and number of listed companies. To ensure robustness of the analysis, the following checks are carried out: (1) usage of alternative indicators of political institutions; (2) employment of two distinct interchangeable sets of moment conditions that engender every category of the instruments; (3) usage of alternative indicators of stock market performance; (4) account for the concern of endogeneity; (5) usage of Principal Component Analysis(PCA) to reduce the dimensions of stock market dynamics and political indicators and then check for further robustness of findings in the regressions from resulting indexes. Findings \u96 Findings broadly demonstrate that democracy improves investigated stock market performance dynamics. Practical implications \u96 As a policy recommendation, the role of sound political institutions is crucial for financial development in Africa. Democracies have important effects on both the degree of competition for public office and the quality of public offices that favor stock market development in the African continent. Originality/value \u96 To the best of our knowledge this is the first paper to assess the incidence of democracy on stock market performance in an exclusive African context. Political strife has plagued many African countries and continue to pose a significant threat to financial market development

Topics: G10, G18, G28, P16, P43, ddc:330, Financial Markets, Government Policy, Political Economy, Development
Publisher: Yaound\ue9: African Governance and Development Institute (AGDI)
Year: 2011
OAI identifier: oai:econstor.eu:10419/123534
Provided by: EconStor

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