The effects of regulation, banking development and selected economic forces on stock market development in African countries

Despite the increased number of stock exchanges in Africa, this segment of the financial market remains underdeveloped with low market capitalization, volume, and liquidity. Efforts of the previous policies to promote the stock market development (SMD) and restore the declining investors’ confidence did not yield positive outcome as they are yet to meet the rising demand of capital for domestic firms. Building on the Arbitrage Pricing Theory (APT), the main objective of this study is to examine the effects of regulation, banking development, and selected economic forces on stock market development in the 12 African countries using the pooled mean group (PMG) model for the period spanning 1996 to 2016. The findings of the first objective reveal a positive and significant relationship between regulatory quality and SMD. On the other hand, the findings of the second objective indicate a negative and significant relationship between banking development and SMD. While the findings of the third objective suggest a positive and significant relationship between the selected economic forces and SMD. Specifically, life expectancy has a positive and significant relationship with SMD. Secondly, poverty reduction is positively related to SMD. Thirdly, there is a positive and significant relationship between unemployment and SMD while the export growth has a positive and significant impact on SMD. In addition, for the control variables of this study, the exchange rate has a positive and significant impact on SMD while both interest rates and financial crisis exert a negative and significant impact on SMD. The findings of this study have several policy implications that include ensuring a sound and effective securities regulation, promoting a complementary banking sector-stock market development nexus, and ensuring stable economic forces to improve the stock market development in Africa that has been slow in recovering from the aftershock of the 2008 global financial crisis