Dynamics between disaggregates of governance and stock market performance in selected South Asia countries

Abstract

This study explores the dynamics between disaggregated factors of governance and stock market development for the panel of selected South Asian countries (i.e., Bangladesh, India, Pakistan and Sri Lanka). Using newly developed data for disaggregates of governance with annual frequency between 1996 and 2014, this study pioneers in South Asian context. Doing so, this study incorporates dynamic panel data technique pool mean group estimation for robust and policy oriented outcomes. The empirical results show that three indicators of governance (control of corruption, accountability and rule of law) have a positive and statistically significant impact on stock market development. The results of long-run estimations are homogenous across the countries but, the short-run estimates, and the speed of adjustment towards the long-run equilibrium are found to be heterogeneous. It could be due to volatility effect of governance in each cross section country. From the policy perspective, the study concludes that the institutional quality and governance are the significant factors on market capitalization in the panel countries. The institutional factors (i.e., control of corruption, accountability and rule of law) support stock market development through high market capitalization, strengthens investor's confidence for long term investment in the countries.