Effect of Market Capitalization on Economic Growth of East African Community

Abstract

Stock markets in developing nations are faced with various constraints such as thin trading, liquidity issues and lack of developed investor base. Most stock markets in Africa are dominated by a single Industry as the backbone of the economy. Therefore, the main aim of this study was to establish effect of market capitalization on economic growth of east African community. The study was guided by Financial Intermediary theory. This study adopted causal research design. Data were obtained from: capital markets, Stock Exchanges (USE NSE, RSE and DSE) of the EAC member countries, annual Statistical report from the EAC website and World Bank as well. Analysis of the data was done using descriptive and inferential statistics. This study adopted a Panel Vector Autoregressive (Panel VAR) model. The results of this study indicated that stock market performance variables have a long run positive effect on the economic growth in the EAC and a bi-directional causality between market capitalization. Therefore, this research is beneficial to East Africa Securities Regulatory Authority (EASRA) in designing of policies that creates favorable business environment for stock markets to flourish. The study recommends that the EAC member governments should pursue policies that can contribute to increased liquidity as this would in turn lead to a higher stock turnover rate. Keywords: Capitalization, Market, Economic Growth, East Africa Community. DOI: 10.7176/JESD/12-10-05 Publication date:May 31st 202