Entrepreneurial finance, primary equity markets, and growth: Evidence from a macro-panel of 97 economies

Economic theory posits that entrepreneurial finance fosters new entrepreneurs, driving technological diffusion and, ultimately, economic development. An efficient financial market influences economic growth through both qualitative and quantitative channels. As a key component of entrepreneurial finance, the primary equity market has been widely recognized for its potential role in promoting economic growth. Yet, the cross-country empirical studies on the role of the primary equity market in economic development remain scarce, largely due to data availability issues and associated methodological challenges in handling complex econometric issues. This study addresses this gap by employing a macro-panel dataset covering 97 countries over 35 years. Using instrumental variable (IV) regressions with five-year averaged data, we find robust evidence that primary equity market development significantly contributes to economic growth. Cointegration analysis using annual data further reveals a long-run cointegrating relationship between the primary equity market and economic growth. The study of short-run deviation around the long-run cointegrating relationship, using the panel-vector error correction model (VECM), confirms significant short-run interactions between the primary equity market and economic growth, while panel-vector autoregression (VAR) tests indicate that causality predominantly runs from the primary equity market to economic growth, rather than vice versa. These findings highlight the importance of primary equity market development as a strategic policy objective for sustaining economic growth. Moreover, findings suggest that firms and portfolio managers can view primary market activity as a forward-looking indicator of future economic performance.