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Democracy and Stock Market Performance in African Countries

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  • Simplice A, Asongu

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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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38168.

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Date of creation: 17 Apr 2012
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Handle: RePEc:pra:mprapa:38168

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

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References

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  1. Beine, Michel & Cosma, Antonio & Vermeulen, Robert, 2010. "The dark side of global integration: Increasing tail dependence," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 184-192, January.
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  4. Simplice A., Asongu, 2011. "New financial intermediary development indicators for developing countries," MPRA Paper 30921, University Library of Munich, Germany.
  5. 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.
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  8. Simplice A. Asongu, 2013. "Real and monetary policy convergence: EMU crisis to the CFA zone," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 5(1), pages 20-38, February.
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  12. Simplice A., Asongu, 2011. "Law and finance in Africa," MPRA Paper 34080, University Library of Munich, Germany.
  13. Simplice A, Asongu, 2012. "African Financial Development Dynamics: Big Time Convergence," MPRA Paper 36053, University Library of Munich, Germany.
  14. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "Investor Protection and Corporate Governance," Working Paper 19455, Harvard University OpenScholar.
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  19. Simplice A., Asongu, 2011. "Law, Finance and Investment: does legal origin matter?," MPRA Paper 34698, University Library of Munich, Germany.
  20. Simplice A., Simplice, 2011. "Why do French civil-law countries have higher levels of financial efficiency?," MPRA Paper 33950, University Library of Munich, Germany.
  21. Simplice A., Asongu, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," MPRA Paper 33868, University Library of Munich, Germany.
  22. repec:sae:niesru:v:149:y::i:1:p:30-52 is not listed on IDEAS
  23. Vaidya, Samarth, 2005. "Corruption in the media's gaze," European Journal of Political Economy, Elsevier, vol. 21(3), pages 667-687, September.
  24. 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..
  25. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
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Cited by:
  1. Asongu Simplice, 2012. "How has Mobile Banking Stimulated Financial Development in Africa?," Working Papers 12/027, African Governance and Development Institute..
  2. Simplice A, Asongu, 2012. "New indicators for the mobile banking nexus," MPRA Paper 38575, University Library of Munich, Germany.

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