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Democracy and Stock Market Performance in African Countries

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  • Asongu Simplice

    ()
    (Yaoundé/Cameroun)

Abstract

Purpose – This paper assesses the incidence of political institutions on stock market performance dynamics in Africa. Design/methodology/approach – 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 – Findings broadly demonstrate that democracy improves investigated stock market performance dynamics. Practical implications – 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 – 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.

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File URL: http://www.afridev.org/RePEc/agd/agd-wpaper/Democracy-and-Stock-Market-Performance-in-African-Countries.pdf
File Function: Revised version, 2013
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Bibliographic Info

Paper provided by African Governance and Development Institute. in its series Working Papers with number 11/021.

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Length: 41
Date of creation: 20 Dec 2011
Date of revision:
Handle: RePEc:agd:wpaper:11/021

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Keywords: Financial Markets; Government Policy; Political Economy; Development;

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References

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  1. Asongu Simplice, 2012. "Real and Monetary Policy Convergence: EMU Crisis to the CFA Zone," Working Papers 12/033, African Governance and Development Institute..
  2. Michel Beine & Antonio Cosma & Robert Vermeulen, 2008. "The Dark Side of Global Integration: Increasing Tail Dependence," CREA Discussion Paper Series 08-03, Center for Research in Economic Analysis, University of Luxembourg.
  3. Asongu Simplice, 2012. "Are Proposed African Monetary Unions Optimal Currency Areas? Real and Monetary Policy Convergence Analysis," Working Papers 12/005, African Governance and Development Institute..
  4. Asongu Simplice, 2012. "African Stock Market Performance Dynamics: A Multidimensional Convergence Assessment," Working Papers 12/004, African Governance and Development Institute..
  5. Simplice A., Asongu, 2011. "Law and finance in Africa," MPRA Paper 34080, University Library of Munich, Germany.
  6. repec:sae:niesru:v:149:y::i:1:p:30-52 is not listed on IDEAS
  7. Simplice A, Asongu, 2012. "African Financial Development Dynamics: Big Time Convergence," MPRA Paper 36053, University Library of Munich, Germany.
  8. Vaidya, Samarth, 2005. "Corruption in the media's gaze," European Journal of Political Economy, Elsevier, vol. 21(3), pages 667-687, September.
  9. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Agency Problems and Dividend Policies Around the World," Harvard Institute of Economic Research Working Papers 1839, Harvard - Institute of Economic Research.
  10. Luzi Hail & Christian Leuz, 2006. "International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 485-531, 06.
  11. Reena Aggarwal & Leora Klapper & Peter D. Wysocki, 2003. "Portfolio preferences of foreign institutional investors," Policy Research Working Paper Series 3101, The World Bank.
  12. Simon Johnson & Andrei Shleifer, 1999. "Coase v. the Coasians," Harvard Institute of Economic Research Working Papers 1885, Harvard - Institute of Economic Research.
  13. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "Investor Protection and Corporate Governance," Working Paper 19455, Harvard University OpenScholar.
  14. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  15. Asongu Simplice, 2011. "New financial intermediary development indicators for developing countries," Working Papers 11/005, African Governance and Development Institute..
  16. Simplice A. ASONGU, 2011. "Why Do French Civil–Law Countries Have Higher Levels Of Financial Efficiency?," Journal of Advanced Research in Law and Economics, ASERS Publishing, vol. 0(2), pages 94-108, December.
  17. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
  18. Rene M. Stulz & Rohan Williamson, 2001. "Culture, Openness, and Finance," NBER Working Papers 8222, National Bureau of Economic Research, Inc.
  19. Asongu Simplice, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," Working Papers 11/007, African Governance and Development Institute..
  20. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  21. J.A. Agbor & J. W. Fedderke & N. Viegi, 2010. "How Does Colonial Origin Matter for Economic Performance in sub-Saharan Africa?," Working Papers 176, Economic Research Southern Africa.
  22. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  23. René M. Stulz, 1999. "Golbalization, Corporate Finance, And The Cost Of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 8-25.
  24. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-75, September.
  25. Simplice A., Asongu, 2011. "Law, Finance and Investment: does legal origin matter?," MPRA Paper 34698, University Library of Munich, Germany.
  26. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, 02.
  27. Ivar Kolstad & Espen Villanger, 2008. "Foreign Direct Investment in the Caribbean," Development Policy Review, Overseas Development Institute, vol. 26(1), pages 79-89, 01.
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Cited by:
  1. Simplice A, Asongu, 2012. "New indicators for the mobile banking nexus," MPRA Paper 38575, University Library of Munich, Germany.
  2. Asongu Simplice, 2012. "How has Mobile Banking Stimulated Financial Development in Africa?," Working Papers 12/027, African Governance and Development Institute..

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