Skip to main content
SpringerLink
Log in

Political regimes and stock market development

  • Original Paper
  • Published:
Eurasian Economic Review Aims and scope Submit manuscript

Abstract

This article highlights an often overlooked element in the finance-growth nexus: the role of political regimes. We 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. We find strong support for Rodrik and Wacziarg’s (Am Econ Rev Papers Proc 95:50–55, 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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. See King and Levine (1993), Levine et al. (2000), Levine and Zervos (1996, 1998), Atje and Jovanovic (1993), among others. Levine (2005) provides a comprehensive literature review on the finance-growth nexus. Though a few articles report stock markets to retard economic growth (see for example Devereux and Smith 1994), the evidence is overwhelmingly in favor of stock markets promoting growth.

  2. Their argument however is based on the premise that political incumbents will naturally favor investor protection and thus rule out rent-seeking behaviors.

  3. Whether it is the size of the market that drives the liquidity or the (initial) level of liquidity is what drives the size is outside the scope of this study.

References

  • Acemoglu, D., & Johnson, S. (2005). Unbundling institutions. Journal of Political Economy, 113, 949–995.

    Article  Google Scholar 

  • Alesina, A., Ozler, S., Roubini, N., & Swagel, P. (1996). Political instability and economic growth. Journal of Economic Growth, 1, 189–211.

    Article  Google Scholar 

  • Atje, R., & Jovanovic, B. (1993). Stock markets and development. European Economic Review, 37, 632–640.

    Article  Google Scholar 

  • Barro, R. J. (1996). Democracy and growth. Journal of Economic Growth, 1, 1–27.

    Article  Google Scholar 

  • Beck, T., Clarke, G., Groff, A., Keefer, P., & Walsh, P. (2001). New tools in comparative political economy: the database of political institutions. World Bank Economic Review., 15, 165–176.

    Article  Google Scholar 

  • Beck, T., & Levine, R. (2004). Stock markets, banks, and economic growth: panel evidence. Journal of Banking and Finance, 28, 423–442.

    Article  Google Scholar 

  • Boyd, J. H., & Smith, B. D. (1998). The evolution of debt and equity markets in economic development. Economic Theory, 12, 519–560.

    Article  Google Scholar 

  • Claessens, S., Feijen, E., & Laeven, L. (2008). Political connections and preferential access to finance: the role of campaign contributions. Journal of Financial Economics, 88, 554–580.

    Article  Google Scholar 

  • Clague, C., Keefer, P., Knack, S., & Olson, M. (1996). Property and contract rights in autocracies and democracies. Journal of Economic Growth, 1, 243–276.

    Article  Google Scholar 

  • Demirguc-Kunt, A., & Maksimovic, V. (1996). Stock market development and financing choices of firms. World Bank Economic Review, 10, 341–369.

    Article  Google Scholar 

  • Devereux, M. B., & Smith, G. W. (1994). International Risk Sharing and Economic Growth. International Economic Review, 35, 535–550.

    Article  Google Scholar 

  • Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117, 1–37.

    Article  Google Scholar 

  • Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: policies and ethnic divisions. Quarterly Journal of Economics, 112, 1203–1250.

    Article  Google Scholar 

  • Engel, E., Hayes, R. M., & Wang, X. (2007). The Sarbanes–Oxley Act and firms’ going-private decisions. Journal of Accounting and Economics, 44, 116–145.

    Article  Google Scholar 

  • Epstein, D. L., Goldstein, J., Kristensen, I., & O’Halloran, S. (2006). Democratic transitions. American Journal of Political Science, 50, 551–569.

    Article  Google Scholar 

  • Faccio, M. (2006). Politically connected firms. American Economic Review, 96, 369–386.

    Article  Google Scholar 

  • Fan, J. P. H., Wong, T. J., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and Post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84, 330–357.

    Article  Google Scholar 

  • Ferguson, T., & Voth, H.-J. (2008). Betting on Hitler—the value of political connections in Nazi Germany. Quarterly Journal of Economics, 123, 101–137.

    Article  Google Scholar 

  • Francis, B. B., Iftekhar, H., & Xian, S. (2009). Political connections and the process of going public: evidence from China. Journal of International Money and Finance, 28, 696–719.

    Article  Google Scholar 

  • Girma, S., & Shortland, A. (2008). The political economy of financial development. Oxford Economic Papers, 60, 567–596.

    Article  Google Scholar 

  • Glaeser, E. L., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). Do institutions cause growth? Journal of Economic Growth, 9, 271–303.

    Article  Google Scholar 

  • Glaeser, E. L., & Shleifer, A. (2002). Legal origins. Quarterly Journal of Economics, 117, 1193–1229.

    Article  Google Scholar 

  • Gourevitch, P. A., & Shinn, J. J. (2005). Political power and corporate control: the new global politics of corporate governance. Princeton: Princeton University Press.

  • Huang, R. D. (1985). Common stock returns and presidential elections. Financial Analysts Journal, 41, 58–61.

    Article  Google Scholar 

  • Huang, Y. (2010). Political institutions and financial development: an empirical study. World Development, 38, 1667–1677.

    Article  Google Scholar 

  • Keefer, P. (2007). Beyond legal origin and checks and balances: Political credibility, citizen information and financial sector development. World Bank Policy Research Working Paper 4154.

  • Keefer, P. (2010). DPI2010. Database of political institutions: changes and variable definitions. Development Research Group. World Bank.

  • Khwaja, A. I., & Mian, A. (2005). Do lenders favor politically connected firms? Rent provision in an emerging financial market. Quarterly Journal of Economics, 120, 1371–1411.

    Article  Google Scholar 

  • King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108, 717–737.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1999). Quality of government. Journal of Law Economics and Organization, 15, 222–279.

    Article  Google Scholar 

  • Levine, R. (2005). Finance and growth: theory and evidence. In P. Aghion and S. N. Durlauf (Eds.), Handbook of economic growth 1A (pp. 865–934). Amsterdam: Elsevier

  • Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: causality and causes. Journal of Monetary Economics, 46, 31–77.

    Article  Google Scholar 

  • Levine, R., & Zervos, S. (1996). Stock market development and long-run growth. The World Bank Economic Review, 10, 323–339.

    Article  Google Scholar 

  • Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. The American Economic Review, 88, 537–558.

    Google Scholar 

  • Lipset, S. M. (1959). Some social requisites of democracy: economic development and political legitimacy. American Political Science Review, 53, 69–105.

    Article  Google Scholar 

  • Marshall, M. G., Jaggers, K., & Gurr, T. R. (2011). Polity IV project. Center for systemic peace.

  • Minier, J. (2009). Opening a stock exchange. Journal of Development Economics, 90, 135–143.

    Article  Google Scholar 

  • Morck, R., Yeung, B., & Wayne, Y. (2000). The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58, 215–260.

    Article  Google Scholar 

  • North, D. M., & Shirley, M. M. (2008). Economics, political institutions and financial markets. In S. Haber, D. North, and B. Weingast (Eds.), Political institutions and financial development. Stanford, CA: Stanford University Press.

    Google Scholar 

  • Pagano, M., & Volpin, P. (2001). The political economy of finance. Oxford Review of Economic Policy, 17, 502–519.

    Article  Google Scholar 

  • Pagano, M., & Volpin, P. (2005). The political economy of corporate governance. American Economic Review, 95, 1005–1030.

    Article  Google Scholar 

  • Pagano, M., & Volpin, P. (2006). Shareholder protection, stock market development, and politics. Journal of the European Economic Association, 4, 315–341.

    Article  Google Scholar 

  • Papaioannou, E., & Siourounis, G. (2008). Democratisation and growth. Economic Journal, 118, 1520–1551.

    Article  Google Scholar 

  • Persson, T., Roland, G., & Tabellini, G. (1997). Separation of powers and political accountability. Quarterly Journal of Economics, 112, 1163–1202.

    Article  Google Scholar 

  • Przeworski, A., & Limongi, F. (1993). Political regimes and economic growth. Journal of Economic Perspectives, 7, 51–69.

    Article  Google Scholar 

  • Qi, Y., Roth, L., & Wald, J. K. (2010). Political rights and the cost of debt. Journal of Financial Economics, 95, 202–226.

    Article  Google Scholar 

  • Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88, 559–586.

    Google Scholar 

  • Rajan, R. G., & Zingales, L. (2003). The great reversals: the politics of financial development in the twentieth century. Journal of Financial Economics, 69, 5–50.

    Article  Google Scholar 

  • Rivera-Batiz, F. L. (2002). Democracy, governance, and economic growth: theory and evidence. Review of Development Economics, 6, 225–247.

    Article  Google Scholar 

  • Rock, M. T. (2009). Has democracy slowed growth in Asia? World Development, 37, 941–952.

    Article  Google Scholar 

  • Rodrik, D., & Wacziarg, R. (2005). Do democratic transitions produce bad economic outcomes? American Economic Review Papers and Proceedings, 95, 50–55.

    Article  Google Scholar 

  • Roe, M. (2006). Legal origins, politics, and modern stock markets. Harvard Law Review, 120, 460–527.

    Google Scholar 

  • Roe, M. J., & Siegel, J. I. (2007). Political instability and financial development. Working Paper. Harvard Law School.

  • Ross, M. (2006). Is democracy good for the poor? American Journal of Political Science, 50, 860–874.

    Article  Google Scholar 

  • Santa-Clara, P., & Valkanov, R. (2003). The presidential puzzle: political cycles and the stock market. Journal of Finance, 58, 1841–1872.

    Article  Google Scholar 

  • Scully, G. W. (1988). The institutional framework and economic development. Journal of Political Economy, 96, 652–662.

    Article  Google Scholar 

  • Sylla, R. (1998). U.S. Securities markets and the banking system, 1790–1840. Federal Reserve Bank of St. Louis Review.

  • Tullock, G. (1987). Autocracy. Dordrecht: Kluwer Academic Publishers.

    Book  Google Scholar 

  • World Bank (2011). Data retrieved March 15, 2012, from World Development Indicators Online (WDI) database.

  • Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics, 58, 187–214.

    Article  Google Scholar 

  • Yang, B. (2011). Does democracy foster financial development? An empirical analysis. Economics Letters, 112, 262–265.

    Article  Google Scholar 

  • Zack-Williams, A. B. (2001). No democracy, no development: reflections on democracy & development in Africa. Review of African Political Economy, 88, 213–223.

    Article  Google Scholar 

  • Zakaria, F. (2003). The future of freedom: illiberal democracy at home and abroad. New York: W.W. Norton and Company.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Lally School of Management, Rensselaer Polytechnic Institute, Troy, USA

    Bill B. Francis

  2. University at Albany and Siena College, Albany, USA

    Eric Ofori

Authors
  1. Bill B. Francis
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Eric Ofori
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Eric Ofori.

Appendix: Data description and sources

Appendix: Data description and sources

A.1 POLITY

This is a measure of political rights prevailing in a country. It runs from 0 to 10 with higher values indicating a more democratic country. Source: POLITY IV Database.

A.2 STKMKTCAP

This is the stock price times the number of shares outstanding of domestic firms as a percentage of GDP. Source: World Bank (2011).

A.3 STKMKTVAL

This is the natural logarithm of stock market value where stock market value is defined as the value of trades of domestic shares relative to GDP. Source: (World Bank 2011).

A.4 STKMKTNVR

This is the value of trades of domestic shares to the total value of listed domestic shares. Source: (World Bank 2011).

A.5 GDPPPP

Thisis the natural logarithm of GDP at purchasing power parity in constant 2005 U.S. dollars. Source: (World Bank 2011).

A.6 TRADE

This is Trade openness which is the sum of exports and imports as a percentage of GDP—it captures a country’s degree of openness. Source: (World Bank 2011).

A.7 POP

This is the country’s population; this includes all residents regardless of citizenship or legal status but excludes refugees and asylum seekers. Source: (World Bank 2011).

A.8 POPGR

Pop growth is annual population growth rate from the middle of year t−1 to year t, expressed as a percentage; the growth rate is assumed to follow an exponential function. Source: (World Bank 2011).

A.9 GNIPC

GNI per capita is gross national income divided by midyear population. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in constant 2000 U.S. dollars. Source: (World Bank 2011).

A.10 ELF

ELF is a variable running from 0 to 1 that represents a country’s level of ethno linguistic fractionalization i.e. the probability that two randomly chosen persons are in different ethnic groups i.e. 0 is a homogeneous ethnic nation and 1 is a heterogeneous ethnic nation. Source: La Porta et al. (1999).

A.11 MILITARY

MILITARY is a dummy variable that equals 1 if the Chief Executive is described as a military officer with no indication of an official retirement at the time they assumed office; the leader is listed as a military officer for the entire time in office. If the Chief Executive has no military rank in their title or was officially retired at the time of assuming office the variable is coded as 0. Source: Database of Political Institutions: Beck et al. (2001).

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Francis, B.B., Ofori, E. Political regimes and stock market development. Eurasian Econ Rev 5, 111–137 (2015). https://doi.org/10.1007/s40822-015-0018-5

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40822-015-0018-5

Keywords

Search

Navigation