Democracy and stock market development: The case of Nigeria.
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Date
2019-03-30
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College of Business and social sciences, Tennessee State University, USA.
Abstract
Institutional economics theories stress the importance of political dispensations as a determinant of
financial market development. The Literature shows that political institutions can influence financial
market system by imposing constrains on the discretion of political power. In addition, a more
democratic system may encourage free market and increase the number of new entrants which helps
existing firms to be more efficient and improves its performance in the stock market. Democracy can
reduce the power of government to manage and control the financial market which in turn increases
the level of competition and further improves participation. However, the empirical findings remain
inconclusive. There is evidence of positive, negative and/or no direct effect of democracy on financial
markets. This paper contributes to this debate by examining the dynamic non-linear effect of
democracy on stock market development for the period of 1984-2015 within nonlinear ARDL
framework. The results show an asymmetric response of stock market to democracy in Nigeria. In a
more specific, it shows that stock market’s response to democracy is negative both in the short run
and long run. This finding serves as a confirmation that the stock market behaviors are related in a
nonlinear way to the institutional fundamentals. The study therefore suggests that weaknesses in
governance system, mismanagement of the economy and failure to grant independence to monetary
authority are the key sources of challenges facing Nigerian stock exchange market. Efficiency of
stock exchange is anchored largely on the efficient institutional environment. A good institutional
framework remains the efficient ways of tackling corruption which has been one of the key factors
most investors are afraid of in the context of Nigerian capital market. Sound regulation quality with
adequate respect for the rule of law, avoid violence and political instability are very important to
ensure efficient operation of Nigerian capital market.
Description
Keywords
democracy, crisis, financial development, Nigeria
Citation
Ajide, F. M. (2019).Democracy and stock market development: The case of Nigeria. Journal of Developing Areas, 53(3),123-139. Published by College of Business and social sciences, Tennessee State University, USA. Available online at https://muse.jhu.edu/issue/39816