Three essays on capital markets and economic growth

Abstract

In the first chapter I show that the establishment of a stock market is beneficial to the typical African country. This chapter investigates the impact of the development of capital markets on economic growth in Africa and reports a significant increase in real GDP per capita after stock exchanges are established. This paper also reveals that there are significant improvements in the level of private investments in the post stock market launch era. The results also indicate that stock markets play a complementary role to the banking sector by contributing to the availability of private credit. Although African capital markets are relatively less advanced when compared to capital markets on other continents (particularly in terms of technology, structure, and liquidity), we find that their establishment has been crucial in helping African countries catch up with the rest of the world.

In my third and final chapter I examine the determinants of cross country differences in cross-border M&A volume around the world by focusing on the effect of political institutions; specifically on countries' level of democracy. I find a country's level of democracy to be a key driver of cross-border M&A volume; the relationship is positive and statistically significant for most of our sample except for sub-Saharan African countries. For countries in sub-Saharan Africa we attribute this inconsistency to the presence of a regional effect. Finally, though having an autocrat as a chief executive impedes the volume of cross-border M&A activity; with a natural resource such as oil, autocratic jurisdictions are able to still attract significantly large inflows of cross-border M&A.

In Chapter 2, I examine why stock markets are able to develop in some countries and not in others by focusing on the role of political regimes. This chapter highlights an often overlooked element in the finance-growth nexus: the role of political regimes. I find political regimes to impact the size of security markets but not the degree of liquidity; there is no statistically significant difference in the volume of shares traded on stock markets between autocracies and the rest of the sample. I find strong support for Rodrik and Wacziarg's [2005] finding that democratic transitions do lead to positive economic outcomes. Though the link between a young democracy on financial development is negative over the period 1990 to 1999, the relationship turns positive from 2000 to 2009, indicating that as democracies mature there is less uncertainty toward investment. This finding is contrary to the perception that a new democracy is likely to function like the typical autocrat. In essence, the effect of democracy on financial development is J-shaped. The data also reveal that military leadership has a negative effect on financial development.

The linkage between financial markets and economic growth cannot be overstated. Financial markets are necessary to channel resources to their best productive use. Well developed financial systems reduce the cost of external finance and information cost for firms, thereby influencing the allocation of capital and consequently affecting the rate of economic growth.