Page | i MMFI Research Report- A Comparative Analysis of the Extent of Investment Banking In Africa versus Other Emerging Markets 2020 Submitted in partial fulfilment of Masters of Management in Finance and Investments Name: Solomon Mphakathi Student number: 1786706 Correspondence: solomon@joburgtheatre.com Witwatersrand Business School Faculty of Commerce, Law, and Management Johannesburg 2050 Supervised by: Professor Kalu Ojah mailto:solomon@joburgtheatre.com Page | ii ABSTRACT This comparative study examines and explains investment banking levels in African emerging markets to the Asia Pacific counterparts. It examines how investment banking activities, especially the raising of capital, influence financial development. There is a paucity of studies conducted in these emerging markets to identify and contrast why their financial development levels are significantly different. African emerging markets appear to be lagging while the Asia Pacific emerging market economies are among the fastest-growing in the world. Finance theory underpins the framing of the study that demonstrates plausible relationship between financial development and economic growth. The methodological procedures followed a quantitative deductive approach through desktop and secondary data analysis to draw conclusions and make inferences. A multiple regression model was used to quantify the effects and extent to which investment banking contributes to financial development. GDP per capita and human development level relate positively to African countries' financial development level. The literature review also revealed some interesting and relevant facts about African economies and the challenges they face. Despite some marked growth in some African economies vis-a-vis others, important structural adjustments appear necessary prerequisites for enhancing Africa's financial and economic development more sustainably. Surprisingly, the empirical analysis identified no evidence of statistically significant relationship between the measure of level of investment banking (in this study) and financial development. Keywords: Investment Banking; Emerging Markets; Financial Development; Finance Theory. Page | iii DECLARATION I, Solomon Mphakathi, declare that this thesis report is my work, except as specified in the references and acknowledgments. This submission is in partial completion of the requirements for the degree of Master of Management in Finance and Investment at the University of the Witwatersrand, Johannesburg. It has not been previously submitted for any degree or examination in this or to any other university. ------------------------------------------------------------- Solomon Mphakathi Signed at …………………………………………………… On the ……………………………... day of ………………………… 2020 Page | iv DEDICATION (OPTIONAL) I dedicate this dissertation to my wife Nezisa and sons Sithi and Lelo. Without you, I would not have had the strength, necessary energy, and drive to complete this work. Page | v ACKNOWLEDGMENTS First and foremost, I thank the Lord Jesus Christ for life and His blessings. I acknowledge my supervisor, Professor Kalu Ojah, for believing in my abilities and guiding me through this research process. I would also like to recognise the unwavering support and prayers from my wife and kids, family, and friends. Without them, I would not have had the strength to produce this piece of work. I also want to extend my special thanks to my company, Joburg City Theatres, represented by its CEO, Ms. Xoliswa Nduneni-Ngema. The study would not have been possible without the financial support and encouragement to stay the course till completion. Finally, thanks go to Meisie, the Programme Coordinator Masters of Management in Finance and Investments at Wits Business School, for her faith in us as students in the MMFI programme. Page | i TABLE OF CONTENTS Title page ..................................................................................................................... i Abstract ...................................................................................................................... ii Declaration................................................................................................................ iii Dedication .................................................................................................................. iv Acknowledgements .................................................................................................... v CHAPTER 1: Introductory Chapter ....................................................................... 1 1. Introduction ...................................................................................................... 1 1.1. Analysis and Motivation .......................................................................... 3 1.2. Background Literature ............................................................................. 5 1.3. Problem Statement ................................................................................... 7 1.4. Research Questions .................................................................................. 7 1.5. Overview of Research Methodology ....................................................... 8 1.6. The Model ................................................................................................ 8 1.7. Potential Outcomes and Benefits ............................................................. 9 1.8. Outline of the Research Report ................................................................ 9 CHAPTER 2: Literature Review on Relationship between Investment Banking and Financial Development ............................................................................................................. 11 2. The literature review ...................................................................................... 11 2.1. Introduction ............................................................................................ 11 2.2. Definition of key concepts ..................................................................... 13 2.3. Theoretical Framework .......................................................................... 17 2.4. Investment Banking Comparison ........................................................... 18 2.5. Role of investment banking ................................................................... 18 2.6. Investment banking and the acquisition process .................................... 19 2.7. Cost of going public ............................................................................... 19 2.8. The economics of securities and the role of government in investment banking 21 2.9. The right private equity for African economies ..................................... 22 2.10. Structuring syndicated loans .................................................................. 22 2.11. The performance of hedge funds ........................................................... 23 2.12. Financing in developing economies ....................................................... 24 2.13. Analysis of Global IPOs ........................................................................ 28 2.14. Conclusion of the chapter ...................................................................... 30 Page | ii CHAPTER 3: Research Methodology .................................................................... 31 3. Introduction .................................................................................................... 31 3.1. Research Methodology .......................................................................... 31 3.2. Population and Sampling ....................................................................... 32 3.3. The Model .............................................................................................. 32 3.4. Limitations of the study ......................................................................... 33 3.5. Conclusion of the chapter ...................................................................... 33 CHAPTER 4: Presentation of Findings ................................................................. 34 4. Introduction .................................................................................................... 34 4.1. Data series plot African emerging markets: ........................................... 34 4.2. Data series plot Asian emerging markets: .............................................. 35 4.3. Stationarity test ...................................................................................... 35 4.4. Descriptive statistics- African emerging markets .................................. 36 4.5. Model 1 results in African emerging markets ........................................ 37 4.6. Descriptive statistics-Asian emerging markets ...................................... 38 4.7. Model 2 results- Asia emerging markets ............................................... 39 4.8. Conclusion of the chapter ...................................................................... 40 CHAPTER 5: Conclusion and Way forward ........................................................ 41 5. Introduction .................................................................................................... 41 5.1 Literature review .......................................................................................... 41 5.2 Hypothesis results testing............................................................................. 41 5.3 Implications of the study .............................................................................. 43 5.3.1 Government ............................................................................................ 43 5.3.2 Investment banks ................................................................................... 43 5.3.3 Academia ............................................................................................... 43 6. Bibliography ................................................................................................. 45 7. Annexure A ................................................................................................... 48 8. Appendix B ................................................................................................... 51 9. Appendix C ................................................................................................... 51 10. Appendix D ................................................................................................... 52 Page | iii List of Tables Table 1: MSCI Barra's Emerging Market Index ......................................................................................... 2 Table 2: Market Capitalisation outlook in both African Emerging Markets and Asian Emerging Markets ............................................................................................................................................. 5 Table 3: Financial Development by Regions ............................................................................................... 11 Table 4: Financial Depth and financial efficiency for the latter part of the sample period ................... 13 Table 5: Financial Development across Countries ..................................................................................... 16 Table 6 SSA: Indicators of financial development by income group, 1995-2013 .................................... 25 Table 7: Trend in private investment and financial development in selected countries ........................ 26 Table 8 African emerging markets-full statistic summary Statistics, using the observations 2000 – 2018. .................................................................................................................................................. 36 Table 9 Africa-model results ........................................................................................................................ 37 Table 11- Full statistics- Asian emerging markets ..................................................................................... 38 Table 12- Model results-Asia emerging markets........................................................................................ 39 Page | iv Table of Figures Figure 1: Trend of credit to the Private Sector and Interest Rate Spread .............................................. 26 Figure 2 Top sub-Saharan banks ranked by Tier capital ......................................................................... 27 Figure 3 Relative size of African banks ...................................................................................................... 27 Figure 4: Global proceeds raised via IPO and FOs, 2009-2018 ................................................................ 28 Figure 5 Private Equity debate .................................................................................................................... 29 Figure 6 Asia market update........................................................................................................................ 29 Figure 7 Capital raised from IPOs by country in South East Asia .......................................................... 30 Page | 1 CHAPTER 1: Introductory Chapter 1. Introduction This study examines and explains investment banking levels in African emerging markets compared to Asia Pacific emerging markets. Furthermore, it examines how investment banking activities, especially the raising of capital, influence financial development. A paucity of studies has been conducted in these emerging markets to identify and contrast why their financial development levels are significantly different. African emerging markets appear to be lagging, while the Asia Pacific emerging market economies are among the world's fastest-growing economies. The investment banking levels consider the availability of investment banking, financial development, and firms' problems in accessing external finance or capital. This research work is structured as follows to give context to the study: Firstly, the literature review on a broad overview of investment banking and related services. Secondly, a closer look and synthesis of critical investment banks in African emerging markets and some of the emerging comparative market is provided. Furthermore, the study also covers the role of investment banking in financial development. A model on investment banking's financial development role with key variables carefully selected based on their relevance and robustness to the study is proposed. Emerging markets are growing or transitioning from developing countries to developed countries (Stowell, 2013). Countries such as India, Mexico, China, with most of South East Asia, countries in Eastern Europe, and the Middle East are known to fall within emerging markets using the MSCI Barra's Emerging Market Index (Stowell, 2013). Operational investment banking activities in the emerging market countries is seen as both a significant revenue opportunity and a big risk. Stowell (2013) argues that investment banks that have prioritised and focused on these regions have earned benefits and are thriving. These investment banks including but not limited to; Citi Group, Goldman Sachs, J.P. Morgan, UBS, and Morgan Stanley. Their product/service range varied from securities underwriting, syndicated lending, mergers and acquisitions, and several other trading Page | 2 and investing activities. Table 1 presents countries listed in the MSCI Barra's Emerging Market Index. Table 1: MSCI Barra's Emerging Market Index The Morgan Stanley Capital Markets International (MSCI) Barra's Emerging Market Index is designed to measure equity market performance in Global Emerging Markets. This index is a float-adjusted market capitalisation index. As of July 2011, it consisted of the indices from 21 emerging economies; namely: Brazil Hungary Morocco Taiwan Chile India Peru Thailand China Indonesia Philippines Turkey Colombia Korea Poland Czech Republic Malaysia Russia Egypt Mexico South Africa Source. MSCI (2011) There is no universally agreed definition of investment banking. As such, this study has looked at several definitions from different authors, as presented below. - Iannotta (2010) defines investment banking as whatever banking that is not commercial banking. He argues for including the services provided by investment bankers, which comprise of a heterogeneous set of activities, which can be classified into (a) underwriting and advisory services, (b) trading and brokerage, and (c) asset management, both traditional and alternative portfolios. - Fleuriet (2008) defines investment banking as purchasing securities from issuers and reselling to the public. He notes that major groups in investment banking include companies involved in the underwriting, purchasing, selling, or brokerage of securities and other financial contracts in their account or for the account of others. Some of an investment bank's core functions include raising capital, trading securities, and advising on corporate mergers and acquisitions. He summarises as: "The scope of investment banking includes all major capital market activities Page | 3 such as underwriting, private placement, M&A, venture capital, market making, proprietary trading, financial engineering, clearing and settlement, and financing and money management." Investment banks' role is crucial in providing finance for growth and development globally, particularly in the emerging markets and small and medium enterprises. These definitions provide a framework through with this study conceptualises investment banking to mean. World Bank's Enterprises Survey (2014) surveyed enterprises that aimed to develop a new measure of firms' credit-constrained status, using hard data instead of perceptions data. Veselin Kuntchev (2014) argues that the findings from that analysis were that small and medium enterprises are likely to be more credit constrained than large firms. Furthermore, those small and medium enterprises tend to finance working capital and investment using trade credit and other informal finance sources, more often than large firms. This phenomenon is the case in most of the developing countries across the world. The observation made is that companies are less likely to be credit constrained in countries with high credit to gross domestic product. In the developing world, access to credit is inversely related to company size or magnitude, and a positive relationship with productivity and financial deepening. These are important observations as they reaffirm the need for investment banks and their growth and development role. 1.1. Analysis and Motivation This sub-section presents investment banking analysis in African emerging market economies compared to Asian emerging market economies. Asian emerging market economies are among the fastest-growing in the world. Unfortunately, the same cannot be said about the African emerging market economies. In table 3 of Chapter Two, where a comparison of financial development by region is shown, a clear contrast is noted. Asian emerging markets have been averaging just over 50 on Liquid Liabilities to GDP while African emerging markets were far below just at over 20 regarding their financial development. Based on private credit extended by deposit money banks to GDP, Asian emerging markets were higher, averaging over 40 percent, while African emerging markets lag, averaging less than 20 percent. Six countries were selected from Africa and Asia as part of this study. Countries like the United States of America and those in the Asian emerging Page | 4 markets are raising billions of capital from the equity market through Initial Public Offerings (IPOs). According to the capital market watch report, China raised capital through IPOs over 60 billion US dollars between 2015 and 2016. In comparison, Malaysia raised over 3 billion US dollars through IPOs. In the African countries, Nigeria could only raise 400 million US dollars from 2010 to 2019, while Ghana could only raise 349 million US dollars from IPOs for the same period. South Africa raised 8.4 billion US dollars from IPOs for the period from 2010 to 2019. As can be seen from the numbers above, the availability of capital for African emerging economies is quite limited. The discussion is important because part of investment banking's key activities is to raise capital from the equity market through Initial Public Offerings. The disparities in these emerging market economies can be ascribed to our investment banking capacity, among other things. This phenomenon is depicted in figures 4 to 7 of Chapter 2. African emerging markets are far from raising this type of capital. This disparity is directly attributable to either the size of these markets' investment banks or lack of adequate investment banking within these markets. The noted disparities between these countries regarding their ability to raise capital and economic growth levels make this research worthwhile and an important gap for further investigation by researchers and academia. The selected countries are South Africa, Nigeria, Ghana, China, Malaysia, and South Korea. However, because of the data limitations on investment banking specific data, six top banks from each of the countries selected were identified. Many banks have corporate and investment banking as a division within the bank, especially in South Africa, termed a universal banking model. The banks' information was sourced from different stock exchanges and other relevant websites (such as google scholar, JSTOR, Booksc.org, World Bank, to mention a few). The banks' information denominated in its country currency was converted into US Dollars ($), using the average spot rate at the reported data date. Table 2 presents the specific countries banking situations concerning capitalisation Page | 5 Table 2: Market Capitalisation outlook in both African Emerging Markets and Asian Emerging Markets Africa Total Assets (USD Billion) 06/2017 Market Capitalisation (USD Billion) Country GDP (USD Billion) Total Assets to GDP Market Cap to GDP South Africa 507.7529 70.9602 348872 0.1455% 0.0203% Nigeria 71.2717 2.5351 375770 0.0190% 0.0007% Ghana 6.8709 0.8200 58996 0.0116% 0.0014% Total 585.8955 74.3153 783,638 0.0748% 0.0095% Asia Total Assets (USD Billion) 06/2017 Market Capitalisation (USD Billion) Country GDP (USD Billion) Total Assets to GDP Market Cap to GDP China 16,263.9700 1,054.4040 12,237,782 0.1329% 0.0086% Malaysia 453.2886 79.6000 314,500 0.1441% 0.0000% South Korea 1.8685 63.1000 1,530,751 0.0242% 0.0041% Total 16,719.1270 1,197.1040 14,083,033 0.1187% 0.0085% Source: Created from various sources Table 2 shows that banks in Africa have lower total assets to GDP at 0.0748% than their counterparts in Asia, sitting at 0.1187%. However, banks from Asia have a lower market capitalisation to GDP at 0.0085% compared to Africa's banks at 0.0095%. This comparison is an attempt to analyse and quantify the extent of banking in these economies. This analysis can then be extrapolated about the extent of investment banking activities in these economies. The difficulty in obtaining investment banking specific information necessitates conducting such an analysis and concluding. South African banks reflected high percentages of total assets to GDP and market capitalisation to GDP compared to other African banks. While in Asia, it was Chinese banks that reflected such strength. 1.2. Background Literature In conducting this study, several research papers written on the related topic are reviewed and considered. Jill (1980) discusses the role investment banks can play in developing emerging domestic financial markets to mobilise funds and provide innovative financial assistance and service. In his concluding remarks in the article, he notes that development banks play an important Page | 6 part and potentially significant role in promoting financing in those countries where investment banking does not exist or where existing securities markets are weak. Dimitris (2019) makes important observations about the emergence and the future of emerging market economies. He argues that the evolution of emerging markets as a distinct economic development segment can be traced to the establishment of the MSCI Emerging Market Index in 1987. This index started with ten countries making up 1% of the global equity market, as shown in the All Country World Index (ACWI). These markets have seen significant growth and transformation to the extent that the countries in the index have grown to 24, accounting for 12% of the MSCI ACWI. Dimitris (2019) further argues that emerging markets are likely to shape the global equity market's future in the next decades. These include economic growth and fiscal discipline, ongoing capital market liberalisation, the adoption of free-market policies, the emergence of world-class companies, the transition from natural resources extraction, manufacturing, and exporting to higher added-value economic activity and domestic consumption. He notes that emerging markets represent 12% of the global equity market free-float and that this will be increasing to about 20% by total market capitalisation and 40% of global economic activity (GDP) and share of company revenues. Another important piece of work is by Goodhart (2016), who seeks to make a case about the increase of US investment banks' market share in the aftermath of the global crises while European banks look to be on the decline. He also argues for China, noting that since 2015, Chinese investment banks have overtaken American and European investment banks' position in the Asian- Pacific market. Norden (2015), in his inaugural address series -- Research in Management --, made important points about the role of banks in SME finance. He contends that Banks play a pivotal role in finance provision to small and medium-size firms (SMEs). These usually form a considerable part of world economies and contribute quite significantly to employment numbers. Secondly, these firms tend Page | 7 to be more dependent on bank finance than large firms. SMEs are usually credit constrained and bank dependent, according to Norden (2015). 1.3. Problem Statement Investment banking does not appear to be playing a prominent role as it ought to in the financial development of African emerging economies, compared to other emerging economies such as the Asia Pacific emerging economies. In the Asia-Pacific emerging market economies, the situation is different. The economies in that region are growing faster than the African emerging market economies. This development can be directly or indirectly linked to investment banking's prominent role in raising capital, primarily through Initial Public Offerings (IPOs). In the development and growth of economies, investment banking plays a critical role, via IPOs and other services relating to the provisioning access to capital for new business creation and/or expansion. The comparison between African emerging markets and Asian Pacific emerging markets covers banks' characteristics in these regions, such as size, regulations, and general macroeconomic performance using indicators such interest rates, gross domestic product (GDP), and inflation rates. This study identifies the key financial ratios in these banks and relate them to some of the selected variables mentioned above to draw a few relevant inferences about investment banking and financial development. 1.4. Research Questions Therefore, this study's main aim is to conduct comparative analysis research on the availability of investment banks and banking in Africa versus select emerging markets in Asia. The study also examined the question of the lack of investment banks and banking in these regions on firms' access to capital. The specific research questions that embody the twin aim of the study are as follows:  What impediments to investment banks in African emerging economies inhibit them from playing the role they should be playing in financial development?  Are there any differences in the regulatory framework of these two emerging markets which could be contributing to the differences in the levels of financial development?  What are the investment banks of emerging markets in Asia doing that will be a lesson for those in Africa emerging market as they grow their investment banking capabilities? Page | 8 1.5. Overview of Research Methodology The study uses regression analysis – ordinary least square (OLS), using a model borrowed from Allen et al. (2014). Another key research methodology followed is secondary data (i.e., desktop literature review) analysis. The literature identified includes, but not limited to, research papers by Berth Caprio et al. (2001), Cetorelli and Gambera (2001), Beck et al. (2001), and Clarke et al. (2001). In addition to the above, several books about investment banking will be reviewed. These books include, for example, Iannotta (2010) and Fleuriet (2008). Data Collection Data are collected from various sources for the financial econometric model for analysis. Data related to credit to the private sector as a percentage of GDP, Human Development Index, GDP per capita for all countries were sourced from the World Development Index of the world bank. IPO data for South Africa were obtained from the JSE. IPO data for the Asia-Pacific countries were obtained from the World Federation of Exchanges website. IPO data for Ghana and Nigeria were obtained from the Capital Market Watch report 2019-PWC. I performed my calculations of IPOs as a percentage of GDP. The data were prepared for analysis on Gretl. The econometric model was used to produce the results. The results are presented in Chapter 4 of this report. Hypothesis The hypotheses tested in the study, based on the borrowed/modified Allen et al. (2014) model, are are as listed below: Hypothesis 1. There is a positive relationship between the level of financial development and the level of investment banking. Hypothesis 2. There is a positive relationship between financial development and the combined effects of investment banking and education level in a country. 1.6. The Model Brooks (2014) defines regression in general terms as describing and evaluating the relationship between a given variable and one or more other variables. Therefore, the regression model's purpose in this study was to evaluate the relationship between financial development and Page | 9 investment banking, education, economic development, and openness. This model is similar to Allen et al. (2014). The study does not seek to establish a causal relationship but uses these as explanatory variables as determinants of financial development (Allen et al., 2014). The model is stated as follows: 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑫𝒆𝒗𝒆𝒍𝒐𝒑𝒎𝒆𝒏𝒕 = 𝐹(𝐸𝑥𝑡𝑒𝑛𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑏𝑎𝑛𝑘𝑖𝑛𝑔, 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠, 𝐸𝑐𝑜𝑛 𝐷𝑒𝑣, 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛) 𝑌𝑖𝑡 =∝ +𝛽1𝑋1𝑡 + 𝛽2𝑋2𝑡 + 𝛽3𝑋3𝑡 + 𝛽4𝑋4𝑡 + 𝜀𝑖𝑡 Thus, - - 𝑌𝑖 - represents the measure of the level of financial development, - 𝑋1 - represents the extent of investment banking, - 𝑋2 represents openness, - 𝑋3 represents the level of economic development, and - 𝑋4 represents the level of education, 𝜀i, is the error term, and t indexes time. 1.7. Potential Outcomes and Benefits This work will assist policymakers with information to use in setting a possible new policy direction that could impact the economic development and growth of their countries. Non-financial firms and investment banks alike are likely to benefit from this research's outcomes by understanding the regulatory environment and challenges related to access to capital. Regulators will also benefit from identifying different regions' regulations to enhance their countries' banking systems' stability and sustainability. 1.8. Outline of the Research Report The presentation of the research report is in five chapters. These being: - Chapter 1 introduces the study and provides context, overview, and the purpose of the study. - Chapter 2 discusses available to uncover the relevant works relating to investment banking and financial development of the macroeconomic environment, Page | 10 - Chapter 3 outlines the research methodology and the theoretical underpinning of the study utilised to analyse data and outlines the data used. - Chapter 4 discusses the findings of this study emanating from the research methodology followed. - Chapter 5 presents the concluding remarks and puts forward based on documented findings and insights from the literature review. Page | 11 CHAPTER 2: Literature Review on Relationship between Investment Banking and Financial Development 2. The literature review 2.1. Introduction Based on the search conducted from various sources such as google scholar, finance journals, and other research websites, literature covering investment banking in African emerging markets and its relationship to financial development is very limited compared to the Asia Pacific emerging markets and European markets. Allen et al. (2014) investigated the African financial development and financial inclusion gaps relative to other peer developing countries. Although this study is related to Allen et al. (2014), it focuses more on investment banking in financial development. Table 3 below reflects the region's financial development levels based on two selected variables to measure financial development—the variables Liquid liabilities to GDP and Private credit extended by deposit money banks to GDP. Table 3: Financial Development by Regions Region 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Liquid liabilities/GDP East Asia and Pacific 49 50 50 50 51 54 55 58 59 64 67 72 Europe and Central Asia 20 22 24 24 26 29 32 36 39 45 45 45 Latin America and the Caribbean 41 43 44 45 45 45 44 45 46 49 51 52 Middle East and North Africa 57 60 58 60 60 59 63 64 61 79 84 96 South Asia 37 39 41 43 50 50 50 47 50 54 56 58 Sub-Sah ran Africa 24 24 25 26 25 26 27 28 29 33 35 36 Private credit extended by deposit money banks/GDP East Asia and Pacific 35 34 34 33 34 38 39 40 44 47 48 51 Europe and Central Asia 11 12 13 14 17 20 25 32 42 42 40 40 Latin America and the Caribbean 33 34 33 31 29 29 30 32 35 37 37 38 Middle East and North Africa 32 33 29 29 28 29 32 33 31 35 37 47 South Asia 21 22 22 22 25 29 32 32 36 38 39 40 Sub-Saharan Africa 14 13 14 15 15 15 16 17 18 20 21 22 This table reports the evolution of liquid liabilities over GDP and private credit over GDP by regions. The period runs from 2000 to 2011. Only middle- and low-income countries are considered. Offshore financial centres are excluded from the sample of countries. Regions in the table correspond to the World Bank Page | 12 Classification. The data source is the World Bank Database on Financial Development and Structure (Beck and Demirguc-Kunt 2009) One of the severe challenges of African countries is sustainable growth that will create employment and reduce poverty (source). Besides, many scholars such as Demirguc-Kunt and Maksimovic (1996), Levine and Zervos (1998), Rajan and Zingales (1998), and Beck et al. (2000) have researched the finance theory and delved into the notion of the relationship between financial development and economic growth with more emphasis on the causality of the relationship. Therefore, it appears that there is more support for finance that precedes growth (Ojah and Kodongo, 2014). Several studies support this dominant viewpoint, among others, include Demirguc-Kunt and Maksimovic (1996), Levine and Zervos (1998), Rajan and Zingales (1998), and Beck et al. (2000). This discussion is important for this topic because one way to measure the extent of financial development in a country is the extent of investment banking in that country, responsible for engaging in investment funding activities and related services critical for economic growth. Menyah et al. (2014) argue that developing countries with infantile financial systems are confined in a vicious circle. Weak financial development leads to weak economic performance, and in turn, substandard economic performance leads to substandard financial development (Fung, 2009). In contrast, countries with the well-established and developed financial system are inclined to develop quicker, and therefore finance does not only support growth but also pro-poor proposing that financial development aids the deprived to catch up with other economies as it develops (see Demirgüç-Kunt, and Levine, 2009; Baltagi et al., 2009). Table 4 shows the level of financial development across regions (Menyah et al., 2014). Page | 13 Table 4: Financial Depth and financial efficiency for the latter part of the sample period Source: World Bank, Wor1d Development Indicators. 2008. World Sub- Saharan Africa East Asia & Pacific South Asia Middle East & North Africa Latin America & Caribbean Domestic credit provided by banking sector (% of GDP) 1995 147.7 79.9 91.6 43.6 63.7 44.1 2005 164.6 82.3 121.4 57.2 53.6 52D Domestic credit to private sector (% of GDP) 1995 I 13.2 63.9 88.4 23.J 31.4 32.7 2005 133.8 64.9 JOI.I 38.7 39.9 27B Interest rate spread (lending rate minus deposit rate) 1995 7.3 I 0.5 6.6 NA. NA. J0.4 2005 6.5 12.2 5.5 5.9 4.8 7B Liquid liabilities (M3) (% of GDP) 1995 95.5 37.2 86.5 43.0 60.2 282 2005 94.8 33.8 141.0 62.7 70.8 40.7 Money and quasi money (M2) (% of GDP) 1995 95.0 33.6 78.2 40.4 54.5 245 2005 95.J 36.6 130.7 58.4 62.9 383 Quasi-liquid liabilities (% of GDP) 1995 324.7 19.9 56.3 26.2 31.0 19.7 2005 741.0 23.0 91.6 41.7 39.0 20A Bank liquid reserves to bank assets ratio 1995 9.7 13.J 11.8 13.4 13.2 14.7 2005 JO.I 15.7 J0.5 15.5 21.8 JOB Gross savings (% of GDP) 1995 21.5 14.2 38.3 25.3 25.J 17B 2005 21.3 J S.I 44.8 32.6 30.4 21D Gross capital formation (% of GDP) 1995 22.3 18.4 39.5 25.J 25.J 195 2005 21.8 19.2 38.4 31.9 26.0 203 2.2. Definition of key concepts Rajan and Zingales (1998) define financial development as the extent to which the financial activity or nominal economy enables and fosters real economic activities. Levine (2002) defines finance-activity as a measure of stock markets and financial intermediaries' activity. To measure stock markets' activity, Levine (2002) uses the total value of shares traded and measures banks' activity, and he uses the private credit ratio. The private credit ratio activity implies the value of credit to the private sector as a percentage of GDP, while he defines the finance-size as the combined size of the stock market and intermediaries. To this end, he uses the market capitalisation ratio as a measure of size. The work of Levine (2002) is critical for this study. It helps to understand these measures, especially as they relate to investment banking in interest areas. Page | 14 Creane, Goyal, Mobarak, & Shab (2004) define financial development as a multifaceted concept, encompassing not only monetary aggregates and interest rates but also regulation and supervision, degree of competition, financial openness, institutional capacities such as the strength of property rights, the variety of markets and financial products that constitute a nation's financial structure. According to Misati & Nyamongo (2011), the evidence available on finance and growth has ignored the relationship between financial development and investment and focused more on economic growth. Misati and Nyamongo (2011) argue that the objective of mobilising resources through financial intermediaries and capital markets development is to provide finance for private investment, and this notion supports the postulations that financial development first impacts capital formation or investment, then it is translated into economic growth. While Africa's dismal economic growth can be attributed to a multitude of factors, there is no denying the fact that past barriers to free international trade and lack of financial development are among the prominent factors that could have contributed to the continent's low economic performance (Beck et al. 2011; Ndulu et al. 2007). The definition of financial development encompasses investment banking as part of the financial intermediaries responsible for raising resources and allocating capital. Therefore, it is crucial to have well developed and well- functioning investment banks to carry out this critical task. One way investment banks can execute their task is by raising capital through Initial Public Offerings. The study looks at Initial Public Offerings (IPOs) organised by the investment banks to measure the investment banking activity and examine the number of investment banks in the emerging market economies. These will indicate the extent of investment banking in a particular country. It is also worth stressing that the study will not be examining causality between investment banking activities in a particular country and the level of financial development. Nevertheless, it will merely examine to what extent there is a positive relationship between the level of investment banking and financial development, if at all, there is any. Chiarella et al. (2016) have argued that banks require a more fundamental change in the way they operate. Further, the traditional capital markets and investment banking models are no longer an Page | 15 option, especially after 2007/2008. The global crisis has seen declining revenues for the banks and rising operating costs. Chaudhuri, Vinayak, & Poullet (2011) have noted the economic rise of Asia. However, they also noted that the rise results from India and China's rise and other countries within the region, particularly countries in the Association of Southeast Asian Nations (ASEAN). They argue that this region contributed about 9% of Asian growth in wholesale banking revenue and 13% from the Capital Markets and Investment Banking (CMIB) revenues. They are noting several factors for this impressive growth, such as the need to develop roads, ports, power plants, and the governments' determination to expand capital markets. Rajan & Zingales (1998) argue that financial development ought to measure the easiness with which those that borrow money and those who save money can come together and, once together, the confidence they have in one another. Financial development ought to be correlated to the variety of intermediaries and markets available, the adeptness with which they execute the assessment, monitoring, accreditation, communication, and dissemination of funds roles, and the associated legal and regulatory framework guaranteeing performance. The table below reflects the level of financial development across countries by Rajan and Zingales (1998). Page | 16 Table 5: Financial Development across Countries Country Accounting Standards Total capitalization over GDP Domestic credit to the private sector over GDP Per capita income (dollars) Bangladesh 0.20 0.07 121 Kenya 0.28 0.20 417 Morocco 0.41 0.16 807 Sri Lanka 0.44 0.21 252 Pakistan 0.53 0.25 290 Costa Rica 0.53 0.26 2,155 Zimbabwe 1.01 0.30 441 Jordan 1.16 0.54 1,109 Egypt 24 0.74 0.21 563 Portugal 36 0.82 0.52 2,301 Peru 38 0.28 0.11 842 Venezuela 40 0.34 0.30 3,975 Colombia 50 0.21 0.14 1,150 Turkey 51 0.35 0.14 1,081 Chile 52 0.74 0.36 2,531 Brazil 54 0.33 0.23 1,650 Austria 54 1.00 0.77 9,554 Greece 55 0.74 0.44 3,814 India 57 0.50 0.24 240 Mexico 60 0.39 0.16 2,651 Belgium 61 0.65 0.29 11,226 Denmark 62 0.56 0.42 12,188 Germany 62 1.08 0.78 12,345 Italy 62 0.98 0.42 6,460 Korea 62 0.63 0.50 1,407 Netherlands 64 0.91 0.60 11,155 Spain 64 1.02 0.76 5,087 Israel 64 1.18 0.67 3,573 Philippines 65 0.46 0.28 729 Japan 65 1.31 0.86 9,912 France 69 0.70 0.54 11,337 New Zealand 70 0.59 0.19 7,490 South Africa 70 1.51 0.26 2,899 Norway 74 0.63 0.34 13,430 Page | 17 Country Accounting Standards Total capitalization over GDP Domestic credit to the private sector over GDP Per capita income (dollars) Canada 74 0.98 0.45 10,486 Australia 75 0.82 0.28 9,866 Malaysia 76 1.19 0.48 1,683 Finland 77 0.52 0.48 10,181 UK 78 0.78 0.25 9,600 Singapore 78 1.96 0.57 4,661 Sweden 83 0.79 0.42 14,368 Notes: Accounting standards are an index developed by the Center for International Financial Analysis and Research, ranking the amount of disclosure in each country's annual company reports. Total capitalization to GDP is the ratio of the sum of equity market capitalization (as reported by the IFC) and domestic credit (IFS lines 32a-32f but not 32e). Domestic credit to the private sector is IFS line 32d. Per capita income in 1980 is in dollars and is from the IFS. Essentially investment banks are responsible for working with corporations that seek to raise capital through public or private capital markets. Investment banks also manage risks in their existing capital, and also complete Mergers and Acquisition (M&A) - related tractions, provide financing through direct investments in corporate entity and debt securities, provide loans to corporate clients, and assist government entities in raising capital and manage risk (Stowell, 2010). 2.3. Theoretical Framework The study is underpinned by the finance theory, where there is a universal acceptance that there is a relationship between financial development and economic growth. However, the disagreement is on the causality of the relationship (Schumpeter, 1934), (Robinson, 1929), (King & Levine, 1993a&b), (Levine, 2002) and (Rajan & Zingales, 1998). According to Schumpeter (1934), financial development precedes economic growth, while Robinson (1929) posits that economic growth precedes financial development. Levine et al. (2000) postulate that the cross-country differences in legal and regulatory systems influence financial intermediation development. Levine (2002) argues that classifying as bank-based or market-based is not useful, and though there is a robust link between financial development and the economy, there is no support for either bank-based or market-based view. Page | 18 2.4. Investment Banking Comparison Investment banks in the United States of America, Europe and Asian markets are much bigger than the African markets investment banks by market capitalisation and revenues. Below are the top 10 investment banks by http://graphics.wsj.com/: Global Investment Banking Bank Ranking YTD 2020 YTD 2019 Bank Revenue $m % share Rank Revenue $m % share JPMorgan 7,409.8 9.2 1 6,327.9 8.9 Goldman Sachs 6,660.1 8.3 2 5,310.7 7.5 Morgan Stanley 5,378.0 6.7 3 4,379.1 6.2 BofA Securities 5,370.0 6.7 4 4,369.6 6.2 Citi 4,307.1 5.4 5 3,573.1 5.0 Credit Suisse 3,527.6 4.4 7 2,703.0 3.8 Barclays 2,867.5 3.6 6 3,039.1 4.3 Deutsche Bank 2,107.0 2.6 8 1,985.2 2.8 Jefferies LLC 1,763.0 2.2 12 1,349.3 1.9 Wells Fargo Securities 1,594.1 2.0 9 1,549.5 2.2 Subtotal 40,984.1 51.1 34,586.5 48.7 Total 80,183.5 100.0 71,023.4 100.0 Source: Investment Banking Scorecard - WSJ.com The African markets investment banks are much smaller, and the capital markets in the developed countries are larger by market capitalisation and volume trade than African countries. The size of the investment banks and capital markets translates to financial development in the developed and Asian markets. 2.5. Role of investment banking Gill (1980) argues that the promotion of securities markets, especially equity markets, is crucial in improving domestic financial markets' efficiency. Investment banks, merchant banks, and brokers are critical to this process, and development institutions can, and some have already played a role. http://graphics.wsj.com/investment-banking-scorecard/ Page | 19 The development of investment banking is traced way back to the 15th century in Europe and predated both the commercial banks and the securities markets. The Glass Steagal Act of 1933 then separated commercial banking from the corporate securities underwriting in North America (Gill, 1980). In many developing countries, investment banks evolved for new needs created by the development of the financial sector or the gaps in the existing services offered by commercial banks, and to a lesser extent, the development banks contend (Gill, 1980). 2.6. Investment banking and the acquisition process As part of its key activities and functions, investment banks exist to assist corporations in raising capital. Firms raise funds for investing purposes by selling diverse securities, which they market in diverse ways. According to the Dealers' Digest (1985) reports, $355.3 billion in public securities trades have been sponsored or underwritten between 1980 and 1984. Of the total amount, 24 percent is common stock, 5 percent is preferred stock, 63 percent is debt, 2 percent is convertible preferred stock, and 6 percent is convertible debt (Smith, 1986). Smith (1986) found that the average stock price responses to public security issues are either negative or not materially far away from zero. He argues that the hypothesis also has implications for other associated events, such as dividend variations and security buybacks. Therefore, it is conceivable to appraise their comparative merit by taking lessons from prevailing evidence about price responses to the associated announcements. As corporations choose the type of security to be issued, they need to be aware of the announcement's market reaction implications. There are numerous hypotheses for the pattern of relative stock price reactions, such as the optimal capital structure, implied cash flow change, unanticipated announcements, information asymmetry, and the ownership changes (Smith, 1986). 2.7. Cost of going public This section discusses the cost of going public as an investment banking activity. Ritter (1987) argues that for companies going public, capital markets are not without friction. Moreover, there are costs involved, and these can be quite significant. The costs involved are Page | 20 classified between direct and indirect costs. The direct costs include the investment banker fees, while indirect costs are under-pricing costs, also known as leaving money on the table. Ritter (1987) continues to argue both components are economically substantial, with the total costs, stated as a percentage of the realized market value of the securities issued, are on average 21.22% for firm commitment offers and 3l.87% for best efforts offers. It is important to note that with both forms of investment banking contracts, the process of going public begins with the registration statement, encompassing descriptive information about the issuing company and the planned offer, which is filed with the United States Securities and Exchange Commission (SEC). Upon SEC approval, the issuing entity and the investment bank hold a pricing meeting from which an offer price and the number of shares to be issued is agreed upon. According to Ritter (1987), when an offer price has been fixed, shares cannot be traded at a higher price even if the issue's demand is suddenly high. Although the investment banker can sell shares at a lesser price, it disrupts the syndicate. It is also worth noting that while the costs of going to the public are, on average, considerably high for best efforts offers, this is partly because there are considerable economies of scale, and best efforts offer are inclined to be lesser than firm commitment offers. One probable reason for choosing a firm commitment and a best-efforts deal, given by Mandelker and Raviv (1977), relates to the optimal bearing of proceeds risk, explained as the uncertainty around the extent of money being raised. Mandelker and Raviv argue that in a best-effort offering, the proceeds risk is born by the issuing company, whereas in a firm commitment, the risks are born by the investment banker. For firm commitment offers, a preliminary prospectus is usually dispensed some weeks before the actual offer. The preliminary prospectus indicates possible lowest and highest offer prices and a possible quantity of shares to be traded (Ritter, 1987). Pyles et al. (2009) found that consistent with previous studies, Real Estate Investment Trusts (REITs) IPOs are associated with lower under-pricing levels relative to legal issues. It was also found that REITs are associated with smaller file price revisions. Both findings are potentially attributable to the lower level of uncertainty associated with pricing REITs. Page | 21 Both the apparent costs billed by the sponsors or underwriters and the hidden or implicit costs of mispricing are studied (e.g., Ritter 1987; Lee et al. 1996). According to Ritter (1987), this line of works is extended by examining whether openly available material before the initial public offering (IPO) decreases initial pricing ambiguity and, thus, the costs of going public. Muscarella and Vetsuypens (1989) examine the asymmetric information hypothesis as it relates to the under- pricing of IPOs through a comparison of a sample of initial public offerings that previously experienced a leveraged buyout (LBO) with a control sample of non-LBO IPOs (Ang and Brau, 2002). 2.8. The economics of securities and the role of government in investment banking The extent of investment banking includes the role played by government and development finance institutions in raising capital. To this end, Bkhchandani (1993) alludes to the fact that there are several auction types that governments engage in raising funds. The study focuses mainly on the American perspective—the Department of Treasury usually auctions thirteen weeks and twenty-six-week bills weekly. The department also auctions more extended maturity notes, bills, and bonds less frequently than short maturity instruments. Bills for a year are auctioned every month, while bonds with a 30-year maturity are auctioned biannually (see Fabozzi (1991) for an auction schedule). Presently, thirty-eight primary dealers are permitted to submit sealed bids at the auction (Bkhchandani, 1993). Bkhchandani, (1993) suggests that there are also non-competitive bidders, mostly single investors, who submit closed bids that stipulate only the quantity required, up to the highest stipulated by the Treasury department. The non-competitive bids often succeed at a price equal to the quantity- weighted average of the successful competitive bids. The Federal Reserve Bank also partakes in the auction, both on its account and as a proxy for foreign central banks. The forms of auction comprise a discriminatory auction (successful bidders pay the unit price they tendered), uniform- price auction (beginning with the uppermost price bidder downward, are fulfilled or satisfied until all the objects are allotted. Nevertheless, the successful bidders pay only the uppermost losing bid price, even if their bids were higher), ascending-price auction (the auctioneer begins with a low price, and prices are call out at increasing sequence), and a descending-price auction (begins with Page | 22 the highest price, the auctioneer calls out prices at a decreasing sequence until a bidder buys more or less all of the objects at the current price). 2.9. The right private equity for African economies This section discusses private equity as an activity of investment banking. Ojah (2009) contends that the most valuable commodity for an entrepreneur the world over is access to external finance, whether in debt or equity contracts. By definition, entrepreneurs are looking for production opportunities beyond the resources they own or control, and that requires external finance as its foundation of existence. This foundation is predominantly significant because entrepreneurs are a most critical foundation of creating jobs that never existed and economic growth in both advanced and unindustrialized economies (Blau, 1987; Wennekers and Thurik, 1999; Schramm, 2006; Acs & Szerb, 2007 and Klapper et al., 2007). Ojah (2009) argues that finance can be made available to entrepreneurs in various ways, including firming up the banking industry, establishing government-sponsored credit funding programs, and establishing private equity markets. Of the different mechanisms available to entrepreneurs to raise capital, private equity markets appear to be more suitable for both innovation and can progress into sustainable public enterprises (i.e., it seems most appropriate to generating publicly held companies). Further, Ojah (2009) argues that the right kind of private equity market for African countries is the Venture Capital / Angel Finance three platforms. Sometimes called a finance-cum-managerial support platform, an equity investment fund is made available to entrepreneurial (privately held) companies or start-ups that hold attractive product concept(s) that are still to accomplish maintainable consumers' acceptance. The Buy-Out / Going-Private platform is the wrong kind: a private equity scheme intended to uplift or foster production efficiency in a part of or all of an existing company by managing that operation or activity as a private company. 2.10. Structuring syndicated loans The structuring of syndicated loans is discussed here as an activity that flows from investment banking. Dennis and Mullineaux (2000) found that a loan is most likely going to be syndicated as Page | 23 more information about the borrower or person borrowing the money becomes more transparent, as the syndicate's managing agent turns out to be more "reputable," and as the loan's maturity increases. The lead manager holds more incredible scopes of information-problematic loans in its portfolio. Loan syndications, more like loan sales, seem to be driven, in part, by capital regulations, and the liquidity position of the agent bank impacts the probability of syndication, but not the extent. Esty (2001) found that Banks partake in the syndicated loan market for diverse reasons. Arranging banks are usually more concerned with making fee income, looking to structure, and leading transactions. Partaking banks, those attracted primarily in making loan assets while remaining within regulatory constraints on leverage and loan size, look to spread credit exposures to specific borrowers, industries, or countries and develop loans in markets where they do not have origination capabilities. Furthermore, Esty (2001) argues that when financing, it is critical to have certainty. Borrowers often ask for or request completely guaranteed or underwritten bids, meaning that the lead arranger(s) must commit or undertake to provide the loan's full amount on specific terms and pricing. The alternative is a best efforts bid in which the lead arranger undertakes to guarantee or underwrite part of the loan—usually the amount it is willing to keep on its balance sheet—and endeavour to put the balance in the bank market. Although guaranteed or underwritten contracts can be financed more rapidly, the underwriting fee is usually greater to reward the guarantor or underwriter for more significant credit and syndication risks. In practice, just about seventy percent of contracts are concluded on an underwritten basis. 2.11. The performance of hedge funds The performance of hedge funds is discussed in this section as an activity of investment banking. Liang (1999) found that hedge funds vary considerably from traditional investment firms, such as mutual funds. Unlike mutual funds, hedge funds track dynamic trading strategies and have small systematic risk. Furthermore, hedge funds bring into line the fund manager's rewards to the performance of the fund. Hedge fund targets for yields or returns vary from mutual fund targets. Hedge funds are total or absolute performers; for hurdles, some targets such as the T-bill rate plus Page | 24 a premium or LIBOR plus a premium are used. In contrast, mutual funds are relative or comparative performers; such benchmarks as the S&P 500 Index for equity funds and the Lehman Brothers Aggregate Index for bond funds are used. 2.12. Financing in developing economies A vibrant private sector is an essential pre-requisite for triggering economic dynamism, enhancing productivity, diffusing new industrial technologies, maintaining competitiveness, contributing to entrepreneurship development, and reducing poverty (Niklaus, 2005). Although government actions and external support are undoubtedly necessary, the required growth level will only be achieved and sustained due to sustained private sector activity (Nyamongo & Morekwa, 2011). Mlachila et al. (2013) notes that Sub-Saharan Africa is a continent with huge problems on the one hand and massive potential on the other. Its past has been challenging and filled with considerable challenges to further development remain. Poverty is pervasive, human development is relatively low, and growth has not been inclusive. The region faces a huge infrastructure gap, while the investment climate and regulatory environment are relatively weak. There are still weaknesses and challenges in governance and institutional capacity that require further work. According to Bending et al. (2015), The banking sector in sub-Saharan Africa has grown progressively over the past decade. It has bee assisted by the efforts to reforms (Kasekende, 2010), the depth and coverage of financial systems—as measured or quantified by all the standard indicators of financial development, such as the ratios of private sector credit to Gross Domestic Product and broad money (M2) to Gross Domestic Product—there were substantial improvements over the period 2000 to 2013, notwithstanding from a small base Page | 25 Table 6 SSA: Indicators of financial development by income group, 1995-2013 Moreover, Nyamongo (2011) argues that considerable academic literature going way back to Bagehot (1873), Hicks (1969), Schumpeter (1911), McKinnon (1973), and Shaw (1973) puts substantial prominence on the positive contributions of financial systems to investment and economic growth. According to this literature, financial instruments, markets, and institutions arise to improve information asymmetry, enforcement, and transaction costs, which lead to, impacts saving rates, investment choices, technological innovations, and steady-state growth rates. Here, it is acknowledged that well-running financial systems reduce external financial constraints that hinder companies and industrial progression and hence economic growth (Acharya, Amanulla, & Joy, 2009; Boyd & Prescott, 1986; Burcu, 2009; Greenwood & Jovanovic, 1990; King &Levine, 1993a, 1993b; Levine, 1997). Nyamongo (2011) also observed that Table 4 is contrary to financial sector development's expected outcome. It was expected that stock market development in Africa would boost domestic savings and provide complementary sources of long-term financing that would, in turn, increase both the quality and quantity of investment. The unexpected outcome may be explained in a broader context that compares the stock market trend with other emerging markets. However, the stock market development in Africa exhibit upward trends, the average capitalisation (excluding South Africa) of about 27% of GDP is lower than in most emerging markets. For example, Malaysia and Singapore had a capitalisation ratio of about 160% on average during the period under review, which would explain why such countries have realised greater investment levels compared to those in Africa. Page | 26 Table 7: Trend in private investment and financial development in selected countries Figure 1: Trend of credit to the Private Sector and Interest Rate Spread PWC (October 2016, p. 46) found that African banks had the most remarkable year in 2015, growing their entire net interest income by more than twenty percent compared to 2014. South Africa's banking sector is hugely the most established on the continent. Retail banking in South Africa is categorised by intense competition, notwithstanding industry concentration. The report also noted that the South African banking sector has been evolving, and all its banks were ranked by tier 1 capital in the top four banks in Africa. Nigeria's banking sector continues to be driven by loans; the dwindling oil sector has placed pressure on corporate balance sheets and the banking Page | 27 system. Kenya's banking sector continues to grow, motivated by a steady domestic currency, economic growth from within, and middle-class customers' demand for more diversified products. The report also covered the top 5 banks largest bank in the continent by tier 1 capital, as reflected in the figure below: Figure 2 Top sub-Saharan banks ranked by Tier capital Figure 3 Relative size of African banks The African countries lag in private credit as a percentage of GDP, and there are about four countries that are fairly compared. Therefore, this contributes to access to capital and limits growth and development in African countries. According to Beck, Demirguc-Kunt, & Maksimovic (2004), in more concentrated banking markets, companies of all sizes face higher financing obstacles. The impact seemed to be reducing as they moved from smaller to medium and more massive companies. It was further noted that there appears to be a necessary interaction between bank concentration, on the one end, and Page | 28 regulatory and institutional country characteristics and the banking system's ownership structure, on the other end. They argue that the relation between banking concentration and financing obstacles becomes less significant in countries with relatively high levels of GDP per capita, relatively well-developed institutions, an efficient credit registry, and a high share of foreign banks. 2.13. Analysis of Global IPOs According to the 2018 PWC Africa Capital Market Watch Report, African capital markets have historically not featured as the most popular exit route for Private Equity (PE) firms, who have pursued other exit strategies for local portfolio companies, such as sales to strategic investors or management, or other secondary sales to other PE or financial investors. As can be observed from the figure below, the United States has contributed the most IPOs and FOs from 2009 to 2018, followed by the Asian markets like Hong Kong, Japan, and China. The deduction in figure 4 points to the extent of investment banking in these markets as IPOs and FOs are activities facilitated by investment bankers in underwriting and other services. Figure 4: Global proceeds raised via IPO and FOs, 2009-2018 Turner et al. ( 2017), in the Delloite IPO 2017 Report, found that on a value-weighted basis, Private Equity exits through Initial Public Offerings were equivalent to trade sales in 2016. However, we have realised a substantial deterioration in activity from a $7bn peak in 2014. The drop in the number of Initial Public Offerings and capital value of Private Equity-sponsored Initial Public Offerings in 2016 mostly reveals the exit of numerous substantial investments over the past Page | 29 three years (including Healthscope, Spotless Group, Link Group, and MYOB), and the current stage of Private Equity fundraising. Figure 5 Private Equity debate Figure 6 Asia market update Based on the outcomes of figure 4 above, Mainland China is by far the most significant contributor to the number of IPOs that have been facilitated during the period between 2015 and 2016 with over 200 IPOs. However, in terms of the country's currencies, the capital raised seems entirely aligned between Mainland China and Hong Kong. Page | 30 Figure 7 Capital raised from IPOs by country in South East Asia These figures demonstrate the extent to which Asia has contributed to the IPO activities over several years. Both the number of IPOs and the capital raised. It is quite clear that Thailand and Singapore are leading in that space, and they have been consistent over the period reviewed, as reflected in figure 5. Malaysia and Indonesia come second, with the latter showing an upward trajectory. A country with the lowest activity in Vietnam. It would be interesting to compare these to the African countries; however, similar analyses were not found. I presume the analysts have not found exciting trends and activities within the African countries to analyse the IPO performance. 2.14. Conclusion of the chapter Based on the findings from various researchers highlighted in the literature review, Africa is lagging. The financial systems of African economies are small and underdeveloped. The stock exchanges and capital markets are small. The African economy's situation remains unchanged despite the progress made from financial reforms and policy development perspective. Especially in Asian markets, other emerging market economies have improved significantly and participate meaningfully in global space as reflected by the capital raised through their IPOs in the figures above. The banking systems are relatively small in the African context, and many people remain unbanked. Access to credit is a huge problem. Page | 31 CHAPTER 3: Research Methodology 3. Introduction Chapter 3 presents the research methodology model used to analyse the results of this study. The methodology follows a quantitative approach using secondary data obtained from the World Bank Development indicators, World Association of Exchanges website, JSE and the Capital Market Watch report. The data collection is a data series from the year 2000 to 2018. The data focuses on the three explanatory variables: GDP per capita, Human development index and Capital raised through IPOs. The data is analysed through Gretl an econometric model that produces econometric results for analysis and conclusions. Allen et al. (2014) used similar explanatory variables when assessing the African financial development and financial inclusion gaps relative to other peer developing countries. The research paradigm and design are discussed as part of this chapter. The chapter also covers the parameters of the data analysed and the method of sampling used, and the techniques of collecting data. The chapter also covers the discussion on the validity and reliability of data and the robustness of the model. 3.1. Research Methodology The study uses regression analysis of the explanatory variables identified as related to financial development. The analysis is done to test or investigate whether there is a relationship between these variables (mostly proxy for investment banking level or presence) and financial development. The study's crux is to contrast these relationships for Africa economies to those of the other emerging markets, especially Asian economies. The model that is used is borrowed from Allen et al. (2014). The details of the model are discussed below, including the variables considered. Various sources used include credible research information, such as the websites of banking regulatory authorities, websites of the banks, websites of global magazines, and other sites such as World Business Environment Survey (Enterprises Survey), MSCI, HBSC, Bankscope, Bank focus, Bloomberg, Global Finance magazine, and so on. Cross-sectional data will be obtained from these various sources for analysis and comparison. Secondary data is obtained from the various investment banks' websites selected from the country's sample for regression analyses. Page | 32 The data covers the period from 2000 to 2018 for each of the countries selected for the study. The proceeds from Initial Public Offering (IPOs) is used as a proxy for the extent of investment banking, the gross domestic product and/or per capita are used to represent the level of economic development. Lastly, the human development index from the World Bank will be used as a proxy for education, contributing to financial inclusion, according to Allen et al. (2014). The IPOs and human development index data will be logged and lagged where necessary to avoid spurious results and enhance the findings' validity. The analysis will include both the regression analysis results and the literature review above to draw conclusions that sound and supported sound theoretical framework. 3.2. Population and Sampling According to Morgan Stanley Capital Markets Index, there are 21 countries categorised as emerging market economies. Of the 21 countries, a random selection of a sample of six countries was made for the study. In the sample of six countries, three were selected from African countries and another three from Asian countries. For the study's purposes, data related to the three explanatory variables for each of these countries from the year 2000 to 2018 was obtained from World Bank development indicators, the World Association of Exchanges website, JSE, Capital market watch report, and the UNCTAD Statistics page. The explanatory variables are GDP per capita, Human capital index and the Capital raised through IPOs. The data series is analysed using Gretl software to obtain statistical results for analysis and inferences to reach conclusions. 3.3. The Model The regression model used is borrowed from Allen et al. (2014). The model has three explanatory variables: the extent of investment banking, the level of economic development, and the level of education. The model is used to test the hypothesis given above. The model is as follows; 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 = 𝐹(𝐸𝑥𝑡𝑒𝑛𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑏𝑎𝑛𝑘𝑖𝑛𝑔, 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠, 𝐸𝑐𝑜𝑛 𝐷𝑒𝑣, 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛) 𝑌𝑖 =∝ +𝛽1𝑋1 + 𝛽2𝑋2 + 𝛽3𝑋3 + 𝛽4𝑋4 + 𝜀 Where 𝑌𝑖 represents the measure of the level of financial development, and 𝑋1 represents the extent of investment banking, 𝑋2 represents openness, 𝑋3 represents the level of economic development, and 𝑋4 represents the level of education. The variables were carefully selected based on previous studies by Beck et al. (2008) and Levine et al. (2000). Because this study's analysis is Page | 33 closely linked to banking activities, the ratio of credit to the private sector to GDP was chosen as a representative variable measure of financial development. Levine et al. (2000) argue that this variable is also robustly linked with long-run economic growth. The explanatory variables were also carefully considered because of their relationship to financial development. As measured through capital raised from Initial Public Offering, the level of investment banking is an important variable and a variable of interest in this study. The level of education measured by the human development index, and the GDP per capita also contributes to financial development. Allen et al. (2014) argue that the explanatory variables used are based on the earlier studies on the finance-growth nexus by Levine (2005) and the analysis of financial determinants by Beck et al. (2008); Cull and Effron, (2008). Of particular interest in the variables is the use of per capita income, which lagged. Cole et al. (2014) found that education positively impacts financial inclusion and positively impacts financial management. Further lack of education and lack of financial management capacity can deter financial development (Allen et al.,2014). 3.4. Limitations of the study Data on investment banks as a unit is difficult to obtain, especially in the African context, where banks have adopted the universal banking approach where investment activities come with other commercial banking activities. To this end, the form of proceeds from the IPOs as an investment banking activity is used to represent the extent of investment banking in each of the countries selected for the study. 3.5. Conclusion of the chapter The chapter sets out an applicable theoretical framework and useful data and data sources relevant to producing quality work relating to the study. It logically presented how the data will be analysed and presented in order to reach sound conclusions. The explanatory variables that are paramount in this study have been set out in detail. It served as the foundation from which detailed analysis and presentation of findings can take shape. Page | 34 CHAPTER 4: Presentation of Findings 4. Introduction The chapter presents the findings of the study. The results are extracted from regression analysis, using ordinary least square – OLS. The regression analysis examines the relationship between a financial development (dependent variable) and the independent variable, namely, level of investment banking, economic development, and education level in the six selected countries of Africa and Asia. The results are compared to identify similarities and differences to answer the main research question. The results are presented to include summary statistics and regression results for each of the selected countries. The summary statistics extracted consist of graphs, charts and tables, data distributions, including the computation of other statistical information, such as means, variances, and standard deviations (Cooper et al., 2008). Below are the results of the time series plot for African emerging markets data: 4.1. Data series plot of African emerging markets: Source: Gretl software Page | 35 Below are the results of the time series plot for the Asian emerging markets data. 4.2. Data series plot Asian emerging markets: Source: Gretl software 4.3. Stationarity test The data was tested for stationarity variables using the Augmented Dicky Fuller test before running the Ordinary Least Squares regression model (OLS). Data was found to be stationary, meaning that it did not contain any unit roots as per the table shown below except for IPOs capital raised data for African emerging markets. ADF Results from Asian emerging markets Variables ADF-T-stat P-value Interpretation GDP per capita -4.42439 0.001944 Reject null hypothesis no unit root Human Capital Index -4.61713 0.000918 Reject null hypothesis no unit root IPOs capital raised -5.958 1.467 Do not reject null hypothesis Source: Gretl software Page | 36 ADF results in African emerging markets Variables ADF-T-stat P-value Interpretation GDP per capita -3.62434 0.02776 Reject null hypothesis no unit root Human Capital Index -4.46619 0.001658 Reject null hypothesis no unit root IPOs capital raised -5.88043 0.001062 Reject null hypothesis no unit root Source: Gretl software 4.4. Descriptive statistics- African emerging markets The annual data covering a period from the year 2000 to 2018 is used in this study, and it yielded 19 data points for each of the three variables. The GDP per capita and Human capital index was transformed using the first differences resulting in two data points being lost. Only 17 data points were remaining. IPOs capital raised was differenced once losing one data point remaining with 18 data points. GDP per capita had a minimum of -264.60 and a maximum of 232.45 throughout the analysis and a mean of 3.2350. GDP per capita has a negative skewness of -0.024845, as can be seen from the table below. HCI scale had a minimum of -0.008333 and a maximum of 0.011667 throughout the analysis with a mean of 0.00045098. HCI scale is positively skewed at 0.53772. IPOs capital raised had a minimum of -0.24393 and a maximum of 0.23501 throughout analysis with a mean of 0.010556. IPOs capital raised is positively skewed at 0.14258. Below is a table of the results of the full statistics drawn from Gretl software for the data series representing the variables used in this study: Table 8 African emerging markets-full statistic summary Statistics, using the observations 2000 – 2018. Variable Mean Median Minimum Maximum GDP per capita PPP current in 3.2350 21.552 -264.60 232.45 Human capital index HCI scale 0.00045098 0.00066667 -0.0083333 0.011667 IPOs Capital raised 0.010556 -0.0067389 -0.24393 0.23501 Variable Std. Dev. CV. Skewness Ex. kurtosis GDP per capita PPP current in 129.34 39.983 -0.024845 -0.23949 Human capital index HCI scale 0.0044580 9.8852 0.53772 1.0606 IPOs Capital raised 0.11225 10.634 0.14258 0.82299 Variable 5% Perc. 95% Perc. IQ range Missing obs. GDP per capita PPP current in undefined undefined 176.79 2 Human capital index HCI scale undefined undefined 0.0048333 2 IPOs Capital raised undefined undefined 0.095871 1 Source: Gretl software Page | 37 The skewness in the sample for the variables chosen is between -0.024845 and 0.53772, while the kurtosis is between -0.23949 and 1.0606. The skewness is close to zero, which assumes a normal distribution on the dataset. The kurtosis has both light and heavy tails away from the ideal kurtosis of 3. 4.5. Model 1 results of African emerging markets An OLS model was used on Gretl software as specified in the methodology using the time series data from 2000 to 2018. The model was used both in the African emerging markets and the Asian emerging markets. The model seeks to evaluate a relationship between the credit to the private sector as a dependant variable and the GDP per capita, Human capital index and IPOs capital raised as independent or explanatory variables. Below are the results of the multiple regression model for Africa's data series for the selected variables: Table 9 Africa-model results Model 1: OLS, using observations 2002-2018 (T = 17) Dependent variable: Domestic credit to the private sector Coefficient Std. Error t-ratio p-value const 58.2987 2.13132 27.35 <0.0001 *** IPOs Capital raised −14.8938 14.2290 −1.047 0.3143 GDP per capita PPP current in −0.000739250 0.0114873 −0.06435 0.9497 Human capital index HCI scale −530.750 324.964 −1.633 0.1264 Mean dependent var 56.29797 SD dependent var 5.401888 Sum squared resid 355.6829 SE of regression 5.230700 R-squared 0.238181 Adjusted R-squared 0.062377 F(3, 13) 1.354807 P-value(F) 0.299940 Log-likelihood −49.96898 Akaike criterion 107.9380 Schwarz criterion 111.2708 Hannan-Quinn 108.2692 Rho 0.621287 Durbin-Watson 0.640988 Source: Gretl software For Africa results, the IPOs capital raised, which is a proxy for the level of investment banking, is statistically insignificant at a p-value 0.3143. In comparison, the GDP per capita PPP and Human capital index are also statistically insignificant, with p-values of 0.9497 and 0.1264, respectively. The R-squared and adjusted R-squared are at 24% and 6%, respectively. The low R- Page | 38 squared and adjusted R-squared reflect the low explanatory power of the African emerging markets' variables based on the data series obtained. The coefficients for all three explanatory variables are negative. Based on the above results from the model on African emerging markets, there seems to be no relationship between financial development level as denoted by the credit level to the private sector and the three explanatory variables. Based on these results, a percentage increase in any of the explanatory variables results in a decrease in the dependant variable. 4.6. Descriptive statistics-Asian emerging markets GDP per capita had a minimum of -871.30 and a maximum of 1470.1 for the analysis period. GDP per capita had a mean of 59.977. The Human Capital Index had a minimum of -0.0056667, a maximum of 0.0066667, and a mean value of -7.843. While IPOs raised had a minimum of - 0.61535 and a maximum of 0.34887. The mean value for IPOs capital raised was -0.037637. Below are the results of the full statistics for the Asian emerging market data series Gretl software for the period 2000 to 2018: Table 10- Full statistics- Asian emerging markets Summary Statistics, using the observations 2000 – 2018 Variable Mean Median Minimum Maximum GDP per capita PPP current in 59.977 7.6919 -871.30 1470.1 Human capital index HCI scale -7.8431e-005 -0.00033333 -0.0056667 0.0066667 IPOs Capital raised -0.037637 0.00000 -0.61535 0.34887 Variable Std. Dev. CV. Skewness Ex. Kurtosis GDP per capita PPP current in 517.06 8.6209 0.80281 1.6316 Human capital index HCI scale 0.0028322 36.110 0.38836 0.48094 IPOs Capital raised 0.22764 6.0482 -0.55994 0.66712 Variable 5% Perc. 95% Perc. IQ range Missing obs. GDP per capita PPP current in undefined undefined 616.15 2 Human capital index HCI scale undefined undefined 0.0038333 2 IPOs Capital raised undefined undefined 0.29498 1 Source: Gretl software Asian emerging market skewness is between –0.55994 and 0.80281, which around zero, and normal distribution can be assumed. The kurtosis is between 0.48094 and 1.6316, and this is away from the norm of nearly 4. Page | 39 4.7. Model 2 results- Asia emerging markets Below are the results of the multiple regression model for the Asian emerging market data series: Table 11- Model results-Asia emerging markets Model 1: OLS, using observations 2001-2018 (T = 18) Dependent variable: Domestic credit to the private sector Coefficient Std. Error t-ratio p-value const 128.121 6.49671 19.72 <0.0001 *** GDP per capita PPP current in 0.0143834 0.00453821 3.169 0.0068 *** Human capital index HCI scale −2882.44 683.219 −4.219 0.0009 *** IPOs Capital raised 8.07362 8.39736 0.9614 0.3526 Source: Gretl software The R-squared and the adjusted R-squared are 68% and 61%, indicating that the explanatory variables have explanatory power over the dependant variable. For the Asia results, IPOs capital raised is statistically insignificant at a p-value of 0.3526. GDP per capita PPP is statistically significant at a p-value of 0.0068, and the Human capital index is statistically significant at a p- value of 0.0009. Based on the model results above, there is a relationship between the dependant variable and the two other explanatory variables: GDP per capita and Human capital index. While there is no relationship, be the dependant variable and the IPOs capital raised. Therefore, it can be concluded that there is no relationship between the level of investment banking and financial development. Mean dependent var 124.8342 SD dependent var 10.72532 Sum squared resid 633.5972 SE of regression 6.727328 R-squared 0.676001 Adjusted R-squared 0.606573 F(3, 14) 9.736669 P-value(F) 0.000997 Log-likelihood −57.59027 Akaike criterion 123.1805 Schwarz criterion 126.7420 Hannan-Quinn 123.6716 Rho 0.351833 Durbin-Watson 1.175134 Page | 40 4.8. Conclusion of the chapter The chapter captured all the results of the multiple regression model and the statistical analysis of the data. The data relating to IPOs capital raised for South Africa were obtained from the Johannesburg Stock Exchange. Based on the model results, the p-values for the variables chosen were statistically insignificant for all the African countries in the sample. Hypothesis 1. There is a positive relationship between the level of financial development and the level of investment banking. The results of the African emerging market data and the Asian emerging market data were statistically insignificant. Therefore, the hypothesis is rejected, and there is no relationship between investment banking and financial development. Hypothesis 2. There is a positive relationship between the level of financial development and economic development in a country. This hypothesis results were statistically insignificant for all African countries, and the hypothesis is rejected while it was statistically significant for Asian emerging markets. Therefore the hypothesis is not rejected for Asian emerging markets, and there is a relationship between financial development and the level of economic development in a country. Hypothesis 3. There is a positive relationship between the level of financial development and education level in a country. The hypothesis testing results were statistically insignificant for all African countries, and the hypothesis is rejected. The Asian emerging markets model results were statistically significant. Therefore, the hypothesis is not rejected; indeed, there is a positive relationship between financial development and education level in a particular country. Page | 41 CHAPTER 5: Conclusion and Way forward 5. Introduction This chapter provides the literature review findings and the analysis results based on the OLS model results for different countries. Furthermore, it outlines the study's implications and points to suggestions for future research. 5.1 Literature review Literature review uncovered that Africa is lagging in terms of financial systems. The financial systems of African economies are either small or underdeveloped, and a vast majority of people remain unbanked stock exchanges and capital markets are tiny. The resultant problem emanating from the size and state is that of lack of access to credit. The African situation remains despite the progress that has been made from financial reforms and policy development perspective. Meanwhile, emerging market economies, especially in Asian markets, have improved significantly and participated meaningfully in global markets as reflected by the capital raised through their IPOs. 5.2 Hypothesis results testing Hypothesis 1. There is a positive relationship between the level of financial development and the level of investment banking. The results of the African emerging market data and the Asian emerging market data were statistically insignificant. Therefore, the hypothesis is rejected and there is no relationship between investment banking and financial development. Hypothesis 2. There is a positive relationship between the level of financial development and economic development in a country. This hypothesis results were statistically insignificant for all African countries, and the hypothesis is rejected while it was statistically significant for Asian emerging markets. Therefore the hypothesis is not rejected for Asian emerging markets, and there is a relationship between financial development and the level of economic development in a country. Page | 42 Hypothesis 3. There is a positive relationship between the level of financial development and education level in a country. The hypothesis testing results were statistically insignificant for all African countries, and the hypothesis is rejected. The Asian emerging markets model results were statistically significant. Therefore, the hypothesis is not rejected; indeed, there is a positive relationship between financial development and education level in a particular country. Page | 43 5.3 Implications of the study This section deals with the implications and recommendations for the governments as policymakers, the investment banking community, both the banks and the companies that utilize the services of investment bankers, and the academia for future research. These are solely based on the results of this study. 5.3.1 Government Governments should continue to concern themselves with creating and maintaining a conducive and supportive environment for entrepreneurship to thrive, thus facilitating economic growth. Based on this study, the government should continue to focus on entrepreneurial education and training initiatives, as education's relationship with financial development is supported by this study. The government is also encouraged to increase the support for industries that are performing well through the encouragement of investment banking, either by institutions of government or development of new investment banks, and to determine why other industries are not doing well. Support for investment banking and efforts to increase capital allocation might lead to more jobs being created, reduced trade deficit, and improved economic growth. 5.3.2 Investment banks This study's results will be useful to investment banks, especially related to the literature review outcomes. There is a need for greater roleplaying by investment banks providing capital and necessary technical skills for business to thrive in Africa. The investment banks in Africa must grow. Perhaps new entrances enter the space to contribute to financial development and, ultimately, economic growth and more jobs being created so that Africa can be lifted out of poverty and underdevelopment. 5.3.3 Academia There is, forever, a need for new knowledge in the ever-changing world. To that extent, this study's results can be challenged, improved, or confirmed, depending on the circumstances and context. Different samples and sample sizes for different economies can produce different results. Academics, therefore, can apply the methodologies in a different set of data and economies. There is a greater need for research in this field to form a substantial body of work for Africa to grow its financial development and economic growth. Data is very critical, and a lack of credible data hampers research in this field. Page | 44 5.4 Further research & conclusion The study was set out to investigate and explain the relationship between investment banking and financial development in African emerging markets and the Asia Pacific counterparts. The objectives of the study were achieved even though from the data used the relationship between the investment banking and financial development was found to be statistically insignificant from the parts of the literature review it is clear that there is a positive relationship between the two. The model results could be influenced by the small data points of 19 in the sample used. It is possible that with larger data points the results could be different. 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