Over the past decades, the world stock markets have expanded significantly and that stock market from developing countries mainly has played an important role in this. Due to this significant change in the stock market around the world, many companies have shifted their financial structures from the usual practices to more advance sources such as capital inflows from developed nations. A key indicator of stock market development, the capitalization ratio (market capitalization as a proportion of GDP) rose during the past few years in countries such as Thailand where in 2001 the market capitalization was 24. 3% of the country’s GDP to a high as 87. 09% in 2010.
This paper studies macroeconomic factors and institutional factors that are determinants of stock market development in Thailand. The paper is compared to a research paper conducted by the International Monetary Fund using data of emerging economies from 42 countries during the period 1990 to 2004, globally. The paper specifically examines and analyzes the impact from domestic savings, investment, stock market liquidity, macroeconomic stability, private capital flows, banking sector development, and institutional quality on stock market development. The development of an economy’s financial markets is closely related to its overall development.
Well-functioning financial systems provide good and easily accessible information. That lowers transaction costs, which in turn improves resource allocation and boosts economic growth. ” (“Financial sector data”) In this paper we will examine whether such relationship between the market growth and the financial sector is related. To measure stock market development we will use Market Capitalization as a percentage of GDP to measure stock market development.
Additionally, this paper will examine the impact of institutional quality on stock market development because we believe that institutions play an important role in the investor’s decision to whether invest in a particular market. Institutions such as the government plays a major role in the stock market due to they can control the political policies which affects the economy as a whole. Taxation rate, import/export regulations, and in some cases even the central bank are all controlled by the government.
This paper will also provide specific events where institutional quality has affected the stock market significantly. “Institutional quality is important for stock market development because efficient and accountable institutions tend broaden appeal and confidence in equity investment. Equity investment thus becomes gradually more attractive as political risk is resolved over time. Therefore, the development of good quality institutions can affect the attractiveness of equity investment and lead to stock market development. (Yartey, 2008)
The remainder of the paper is organized as follow: Section II discusses the literature on stock market and economic growth. Section III examines the main characteristics of stock markets in emerging market countries. Section V explains the methodology and discusses indicators of macroeconomic and institutional factors that are determinants of stock market development. Section VI describes the empirical results. Lastly, Section VII concludes this paper. II. Stock Market and Economic Growth: Theoretical and analytical issues.
Savings are no longer limited to investing money into savings accounts in financial sectors anymore. With the emergence of stock markets, investors or individuals can both save and earn a specific return. The emergence of the stock market helps to accelerate a countries economy significantly and also provides individuals with saving alternatives and improvements in investment decisions. Stock market helps to improve the economy by providing companies with alternatives to raise capital at a lower cost and additionally reduce risk in the banking sector from credit crunches.
According to “Stock Markets: A Spur to Market Growth” by Ross Levine. Levine has identified that Stock markets affect economic activity through the creation of liquidity where investors are often reluctant to relinquish control of their savings for long periods. Levine specified that liquid equity markets make investment less risky and more attractive because they allow savers to acquire an asset or equity and sell it quickly and cheaply if they needed access to their savings or alter their portfolios.
Evidence linking stock market development to economic growth was presented in many studies conducted around the world but there has been no exact conclusion although many studies have shown a high correlation between the two. A study conducted by Levine and Zervous (1998) has find that stock market activity and economic growth are positively correlated and that stock market liquidity and banking development are both positively and robustly correlated with contemporaneous and future rates of economic growth, capital accumulation, and productivity growth.
Although the numerous studies and research of the relationship of stock market and economic growth has gained attention in academic and policy discussions, there are few theoretical and empirical work on determinants of stock market development in emerging markets. Calderon-Rossell (1991) has developed a model of stock market growth. More details of the model will be discussed in the later sections of the paper.