Political Regimes and Stock Market Performance in Africa

Asongu, Simplice and Nwachukwu, Jacinta C. (2016): Political Regimes and Stock Market Performance in Africa. Forthcoming in: Political Studies Review

Abstract

This paper assesses the effect of political institutions on stock market performance in 14 African countries for which stock market data is available for the period 1990-2010. The estimation technique used is a Two-Stage-Least Squares Instrumental Variable methodology. Political regime 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. The findings show that countries with democratic regimes enjoy higher levels of financial market development compared to their counterparts with autocratic inclinations. As a policy implication, the role of sound political institutions has important effects on both the degree of competition for public office and the quality of public offices that favour stock market development on the African continent.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Markets; Government Policy; Development
• Subjects: G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy; P - Economic Systems > P4 - Other Economic Systems > P43 - Public Economics ; Financial Economics

References

Agbor, J. A., (2015). “How does colonial origin matter for economic performance in SubSaharan Africa?”, in Growth and Institutions in African Development, First edited by Augustin K. Fosu, 2015, Chapter 13, pp. 309-327, Routledge Studies in Development Economics: New York.

Alagidede, P.,(2008). “African Stock Market Integration: Implications for Portfolio Diversification and International Risk Sharing”, Proceedings of the African Economic Conferences 2008.

Alesina, A., Ozler, S., Roubini, N., & Swagel, P. (1996). “Political instability and economic growth”. Journal of Economic Growth, 1(2), pp. 189-211.

Asongu, S. A., (2012a). “Government quality determinants of stock market performance in African countries”, Journal of African Business, 13(3), pp. 183-199.

Asongu, S. A., (2012b). “Law and finance in Africa”, Brussels Economic Review, 55(4), pp. 385-408.

Asongu, S. A., (2013). “African Stock Market Performance dynamics: A Multidimensional Convergence Assessment”, Journal of African Business, 14(3), pp. 186-201.

Asongu, S. A. (2014). “The questionable economics of development assistance in Africa: hotfresh evidence, hot-fresh evidence”, The Review of Black Political Economy, 41, (4), pp. 455- 480.

Asongu, S. A., & Nwachukwu, J., (2016a). “Revolution Empirics: Predicting the Arab”, Empirical Economics: Forthcoming. http://link.springer.com/article/10.1007%2Fs00181-015-1013-0

Asongu, S. A., & Nwachukwu, J., (2016b). “Foreign aid and governance in Africa”, International Review of Applied Economics, 30(1), pp. 69-88.

Bartels, F. L., Alladina, S.N., & Lederer, S., (2009).“Foreign Direct Investment in Sub-Saharan Africa: Motivating Factors and Policy Issues”, Journal of African Business, 10(2), 141-162.

Beck, T., Demirgüç-Kunt, A., & Levine, R.,(2003). “Law and finance: why does legal origin matter?”, Journal of Comparative Economics, 31(4), pp. 653-675.

Bhattacharya, U., & Daouk, H., (1999). “The world price of insider-trading”, Journal of Finance, 57(1), pp. 75-108.

Bittlingmayer, G., (1998), “Output, Stock Volatility, and Political Uncertainty in a Natural Experiment: Germany, 1880-1940”, Journal of Finance, 53(6), 2243-2257.

Darley, W. K.,(2012), “Increasing Sub-Saharan Africa's Share of Foreign Direct Investment: Public Policy Challenges, Strategies, and Implications”, Journal of African Business, 13(1), pp.62-69.

Faccio, M. (2006). “Politically connected firms”. American Economic Review, 96(1), pp. 369-386.

Fisman, R. (2001). “Estimating the Value of Political Connections”. American Economic Review, 91(4), 1095-1102.

Fosu, A. K., (2002). “ Political Instability and Economic Growth: Implications of Coup Events in Sub-Saharan Africa”, American Journal of Economics and Sociology, 61(1), pp. 329-348.

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(4), pp. 696-719.

Friedman, T., L., (1999). The Lexus and the Olive Tree. New York: Anchor Books.

Girma, S., & Shortland, A. (2008). “The political economy of financial development”. Oxford Economic Papers, 60(4), pp. 567-596.

Gray, K. R., & Bythewoo, C., (2001). “Emerging Securities Exchanges in Africa. International Characteristics of the Nairobi Stock Exchange”, Journal of African Business, 2(3), pp.65-73.

IMF (2006, April). “Market Development and Issues”, IMF Global Financial Stability Report, http://www.imf.org/external/pubs/ft/GFSR/2006/01/index.htm.

Keefer, P. (2007). “Beyond legal origin and checks and balances: Political credibility, citizen information and financial sector development”. World Bank Policy Research Working Paper No. 4154, Washington.

Klah, P., (2010). “Coups d’Etat en Afrique : Le rôle toxique de la France”, L’autre cinquantenaire, 1960-2010 : Afrique, les indépendances en questions : https://afriqueindependance.wordpress.com/2010/06/10/coups-detat-en-afrique-le-role-toxique-de-la-france/ (Accessed : 09/10/2015).

Kolstad, I., & Wiig, A., (2011). “Better the Devil You Know? Chinese Foreign Direct Investment in Africa”, Journal of African Business, 12(2), 31-50.

Koutonin, M. R., (2014). “14 African Countries Forced by France to Pay Colonial Tax For the Benefits of Slavery and Colonization”, Silicon Africa, http://www.siliconafrica.com/france-colonial-tax/ (Accessed: 12/03/2016).

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R.W., (1997). “Legal Determinants of External Finance”, Journal of Finance, 52(2), pp. 1131-1150.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R.W., (1998). “Law and finance”, Journal of Political Economy, 106(6), pp.1113-1155.

Mosley, L., (2008). “Taking Stock Seriously: Equity-Market Performance, Government Policy and Financial Globalization”. International Studies Quarterly, 52(2), pp.405-425.

Obstfeld, M., & Taylor, A.M., (2004). Global Capital Markets: Integration, Crisis, and Growth. Cambridge: Cambridge University Press.

Oscarsson, H., (2008), “Media and Quality of Government: A research overview”, Quality of Government Working Paper Series, 2008/12.

Rolfe, R. J., & Woodward, D. P.,(2004). “Attracting foreign investment through privatization: the Zambian experience”, Journal of African Business, 5(1), pp.5-27.

Stulz, R., M., & Williamson, R., (2003). “Culture, Openness and Finance”, Journal of Financial Economics, 70(3), pp. 313-349.

Tuomi, K.,(2011). “The Role of the Investment Climate and Tax Incentives in the Foreign Direct Investment Decision: Evidence from South Africa”, Journal of African Business, 12(1), pp.133-147.

Vaidya, S., (2005), “Corruption in the media's gaze”, European Journal of Political Economy, 21(3), pp.667-687.

World Bank (2010). “World Development Indicators 2010”, The World Bank http://data.worldbank.org/data-catalog/world-development-indicators/wdi-2010 (Accessed: 12/03/2016).

Yartey, C. A., & Adjasi, C. K., (2007). “Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges”, International Monetary Fund Working Paper No. 07/209, Washington.