IDEAS home Printed from https://ideas.repec.org/a/nap/nijefr/2018p59-70.html
   My bibliography  Save this article

Effect of Stock Market Development on Economic Growth: A Case of Nairobi Securities Exchange, Kenya

Author

Listed:
  • Wycliffe Mukulu Musyoka

    (University of Nairobi, School of Economics: Nairobi, Kenya)

  • Evans Geoffrey Mogeni

    (Machakos University, Department of Economics, school of business and Economics:Machakos,Kenya)

  • David Musimbi Murunga

    (Kenyatta University, School of Economics)

  • Pollyne Mbithe Mutunga

    (Mount Kenya University, Department of Economics, School of Business and Economics:Thika,Kenya)

Abstract

Nairobi securities Market has not been performing to the expectation of many Kenyan. The collapse of its two stock brokers almost the same time as caused a lot of anxiety and affected most of individual investors in this institution. This issue interwoven with the under subscription of initial public over (LPO) such as cooperative bank of Kenya and British American Insurance is a clear sign of deterioration in this institution. In relation to newly industrialized countries like Asian tigers which at some point were at par with Kenyan economy but now Kenya is far much behind. The listed companies in stock markets in these economies are much higher compares to the one listed in NSE. This paper carried empirical investigation mainly to establish the short run and long run relationship between stock market development and economic growth in Kenya. The annual secondary data was used for period running from 1992 to 2011.The study used the Ordinary Least squares (OLs) Method to run regression and Error correction model. The economic growth rate was proxied by GDP per capita growth rate. The stock market development was assumed to measure by market capitalization, equity turnover and total shares traded .The study also employed two other variables which were felt to be very crucial in both stock market and economic growth. These were investment and human capital development proxied by university student enrolment. The counteraction test results showed that there was long run relationship between indicators of stock market development and economic growth in Kenya. These results are supported by unit root test graphs. Further investigation by Error Correction Model (ECM) indicated that market capitalization series has negative relationship with economic growth whilst investment series showed very strong and positive relationship with economic growth rate series. The study finds out that stock market development affects economic growth through providing pool of cheap fund for investment. The policy recommendation to the policy makers is that NSE is very crucial institution to be taken into to consideration if Kenya has to realize the dream of being regional financial hub by 2030 by accelerated development to boost domestic and international resource mobilization. The areas policy makers needs  to focus on are various incentives, enhanced competiveness and attractiveness of NSE, regulations of individual and  institution investors, stock brokers players and privatization of state own enterprises.

Suggested Citation

  • Wycliffe Mukulu Musyoka & Evans Geoffrey Mogeni & David Musimbi Murunga & Pollyne Mbithe Mutunga, 2018. "Effect of Stock Market Development on Economic Growth: A Case of Nairobi Securities Exchange, Kenya," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 3(5), pages 59-70, May.
    • Handle: RePEc:nap:nijefr:2018:p:59-70
    as

    Download full text from publisher

    File URL: https://www.napublisher.org/pdf-files/NIJEFR-152-59-70.pdf
    Download Restriction: no
    File URL: https://www.napublisher.org/?ic=journal&journal=5&month=05-2018&issue=5&volume=3
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    3. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    4. Guglielmo Maria Caporale & Peter Howells & Alaa M. Soliman, 2005. "Endogenous Growth Models and Stock Market Development: Evidence from Four Countries," Review of Development Economics, Wiley Blackwell, vol. 9(2), pages 166-176, May.
    5. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Markets, Corporate Finance, and Economic Growth: An Overview," The World Bank Economic Review, World Bank, vol. 10(2), pages 223-239, May.
    6. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    7. Kofi A. Osei, 1998. "Analysis of factors affecting the development of an emerging capital market: The case of the Ghana stock market," Working Papers 76, African Economic Research Consortium, Research Department.
    8. Charles Amo Yartey, 2008. "The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different?," IMF Working Papers 2008/032, International Monetary Fund.
    9. Guglielmo Maria Caporale, & Peter G. A Howells, & Alaa M. Soliman,, 2003. "Endogenous growth and Stock Market Development," Working Papers 0302, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    10. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633.
    11. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210, National Bureau of Economic Research, Inc.
    12. Nauro F. Campos & Jan Hanousek & Randall K. Filer, 1999. "Do Stock Markets Promote Economic Growth?," CERGE-EI Working Papers wp151, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    13. Robert Pollin & Michael Ash & Andong Zhu, 2002. "Stock Market Liquidity and Economic Growth: A Critical Appraisal of the Levine/Zervos Model," Working Papers wp47, Political Economy Research Institute, University of Massachusetts at Amherst.
    14. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    15. David Tennant & Claremont Kirton & Abdullahi Abdulkadri, 2011. "Modelling the effects of financial sector functions on economic growth in a developing country: a cointegration and error correction approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(2), pages 183-206, January-M.
    16. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-228, August.
    17. Osei, K.A., 1998. "Analysis of Factors Affecting the Development of an Emerging Caputal Market: The Case of Gjana Stock Market," Papers 76, African Economic Research Consortium.
    18. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. KEMBOI, Noah & KINYARIRO, Dickson Kamau & GESAGE, Methuselah Bichage & MAINA, Justus Nderitu, 2023. "Relationship Between Dividend Yield And Financial Performance Of Listed Firms At The Nairobi Securities Exchange," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 27(1), pages 6-17, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. , Aisdl, 2019. "Stock Market And Economic Growth In Vietnam," OSF Preprints ucbhp, Center for Open Science.
    2. Nowak-Lehmann D., Felicitas, 2000. "Was there endogenous growth in Chile (1960 - 1998)? A test of the AK-model," University of Göttingen Working Papers in Economics 7, University of Goettingen, Department of Economics.
    3. Onur ÖZDEMİR, 2020. "Revisiting the Finance-Growth Nexus in Turkey: Bayer-Hanck Combined Cointegration Approach over the 1970-2016 Period," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(44).
    4. Ikonen, Pasi, 2010. "Effect of finance on growth through more efficient utilization of technological innovations," Bank of Finland Research Discussion Papers 21/2010, Bank of Finland.
    5. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    6. Durlauf, Steven N. & Quah, Danny T., 1999. "The new empirics of economic growth," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 4, pages 235-308, Elsevier.
    7. repec:zbw:bofrdp:2010_021 is not listed on IDEAS
    8. Rosa Capolupo, 2005. "THE NEW GROWTH THEORIES AND THEIR EMPIRICS, Discussion Paper in Economics, University of Glasgow, N. 2005-04 (http://www.gla.ac.uk/Acad/Economics," GE, Growth, Math methods 0506003, University Library of Munich, Germany.
    9. Yaya Keho, 2011. "Long‐Run Determinants Of Savings Rates In Waemu Countries: An Empirical Assessment From Ardl Bounds Testing Approach," South African Journal of Economics, Economic Society of South Africa, vol. 79(3), pages 312-329, September.
    10. Osman Suliman, 1997. "Innovation and weak labour disposability: some theoretical and empirical evidence," Applied Economics, Taylor & Francis Journals, vol. 29(12), pages 1687-1693.
    11. Koopman, Eline & Wacker, Konstantin M., 2023. "Drivers of growth accelerations: What role for capital accumulation?," World Development, Elsevier, vol. 169(C).
    12. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    13. Sebastian Edwards, 1996. "Public Sector Deficits and Macroeconomic Stability in Developing Countries," NBER Working Papers 5407, National Bureau of Economic Research, Inc.
    14. Kashif Munir & Shahzad Arshad, 2018. "Factor accumulation and economic growth in Pakistan: incorporating human capital," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 45(3), pages 480-491, March.
    15. Muhammad Arshad Khan, 2007. "Foreign Direct Investment and Economic Growth: The Role of Domestic Financial Sector," PIDE-Working Papers 2007:18, Pakistan Institute of Development Economics.
    16. Kang, Jung Mo, 2006. "An estimation of growth model for South Korea using human capital," Journal of Asian Economics, Elsevier, vol. 17(5), pages 852-866, November.
    17. Łukasz Jabłoński, 2011. "Kapitał ludzki w wybranych modelach wzrostu gospodarczego," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 81-103.
    18. Kumar, Ronald Ravinesh & Stauvermann, Peter Josef & Loganathan, Nanthakumar & Kumar, Radika Devi, 2015. "Exploring the role of energy, trade and financial development in explaining economic growth in South Africa: A revisit," Renewable and Sustainable Energy Reviews, Elsevier, vol. 52(C), pages 1300-1311.
    19. P Pegkas & C Tsamadias, 2016. "How important are foreign and domestic investments, exports and human capital for Greece's economic growth?," Economic Issues Journal Articles, Economic Issues, vol. 21(1), pages 23-45, March.
    20. Galimberti, Jaqueson K., 2009. "Conditioned Export-Led Growth Hypothesis: A Panel Threshold Regressions Approach," MPRA Paper 13417, University Library of Munich, Germany.
    21. Kemal Soyer & Hale Ozgit & Husam Rjoub, 2020. "Applying an Evolutionary Growth Theory for Sustainable Economic Development: The Effect of International Students as Tourists," Sustainability, MDPI, vol. 12(1), pages 1-20, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nap:nijefr:2018:p:59-70. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Managing Editor (email available below). General contact details of provider: https://www.napublisher.org/?ic=journal&journal=5&info=aims .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.