Stock market development in Africa: is there a need for a cross-regional collaborative stock exchange?

Abstract

This paper explores the relationship between stock market development and economic growth in Africa. It provides a theoretical basis for establishing the channel through which stock market affect economic growth and this is empirically examined by using regression analysis to test if indeed there is such a relationship. Three stock market indicators, namely market capitalization as a percentage of GDP, turnover ratio and numbers of listed shares, are used to test whether they have any impact on economic growth, together with other explanatory variables of growth such as foreign direct investment, inflation and credit. The study uses data on four countries: Kenya, Nigeria, Egypt and South Africa for the period 1991-2010. Furthermore, the study investigated whether a collaborative regional cross-listing will improve the stock market development of the country of secondary listing. Dummy variables and interactive variables are used in regressions to test for collaborative relationships between the exchanges in the region. The results show that indeed there is an association between stock market development and economic growth. Results also show that cross-listing within a region can boost stock market development, which in turn boosts economic growth. Africa does not have a lot of cross-listings but from this paper, the evidence suggests that it is a path worth exploring.