Stock markets and development: A re-assessment

This paper re-examines the empirical relationship between stock markets and economic growth. In contrast with Atje and Jovanovic (Stock Markets and Development, European Economic Review 37, pp. 632-640, 1993) it finds no hard evidence that the level of stock market activity helps to explain growth in per capita output. Estimating their model using current investment rather than lagged investment suggests that the stock market effect may be weaker than they found. Two stage least squares is used to circumvent the possible endogeneity of current investment. The sample is divided into developed and less developed countries. For the less developed sample, the stock market effect, as with the full sample, is at best very weak. For the developed countries, however, stock market activity does have some explanatory power.