The stock market capitalisation and financial growth nexus: an empirical study of western European countries

Abstract

AbstractThis study aimed to analyse the stock market capitalisation and financial growth nexus of Western European countries from 1989 to 2018 in order to understand the interactive relationship between the stock market and the economy to identify the specific financial market channels through which economic growth is managed. The pooled least square findings identified positive significant relationships between stock market capitalisation, foreign direct investment and stocks traded and financial growth, while negative and significant relationships were found between GDP per capita growth and inflation and financial growth. The fixed effect, random effect and pooled mean group models yielded the same results, indicating positive significant relationships between stock market capitalisation and stocks traded and financial growth, while the effect of foreign direct investment on financial growth was positive and insignificant. Finally, there were negative and significant relationships between GDP per capita growth and inflation and financial growth. The results from the quantile regression (tau = 0.10, 0.20, 0.30, 0.40 and 0.50) there were positive relationships between stock market capitalisation and stocks traded and financial growth for all percentiles, while there were negative relationships between GDP per capita growth and inflation and financial growth except at the 0.30 percentile; foreign direct investment also had a negative relationship to financial growth at the 0.30 percentile. Most variables were significant at a 1% significance level. However, inflation was insignificant at the 0.10 percentile, foreign direct investment was insignificant at the 0.20, 0.30, 0.40 and 0.50 percentiles, and stocks traded were insignificant at the 0.40 and 0.50 percentiles. All of the applied the diagnostic tests confirmed the robustness of the data. The main conclusion is that countries should minimise any regulatory obstacles to financial markets and protect the rights of shareholders. Furthermore, advanced financial systems should reduce the obstacles faced by companies in terms of external financing.