Determinants of stock market development the case of developing countries and vietnam

Ourfindingsareintriguing.First,indevelopingcountrieseconomicgrowth,dom esticcredit,andstockmarketliquidityarepositivedeterminantsofthedevelopmentofst ockmarket.Whiletheeffectofmoneysuppl

PoliciesandSustainableEconomicDevelop ment |1

DeterminantsofStock MarketDevelopment:T h e CaseofDevelo

pingCountriesandVietnam

SUDINHTHANH UniversityofEconomicsHCMC- dinhthanh@ueh.edu.vn BUITHIMAIHOAI UniversityofEconomicsHCMC- maihoai@ueh.edu.vn NGUYENVANBON UniversityofEconomicsHCMC-bonvnguyen@yahoo.com

Abstract

Stockmarketisakeychanneltothemobilizationof termcapitalinaneconomy,anddeterminantsofstockmarketdevelopmentindevelopin gcountriesarestillundecided.ThispaperaimstoinvestigatethesedeterminantsinViet namandotherdevelopingcountries,whosedifferencesarealsopointedoutbyapplyingt wo-

long-wayGeneralizedMethodofMomentstothepaneldataof36developingcountriesoverthe periodof2003–

2 0 1 4 Ourfindingsareintriguing.First,indevelopingcountrieseconomicgrowth,dom esticcredit,andstockmarketliquidityarepositivedeterminantsofthedevelopmentofst ockmarket.Whiletheeffectofmoneysupplyisnegative,institutionalfactorssuchasgove rnmenteffectivenessandruleoflawhavesignificantlypositiveimpacts,incontrasttocor ruptioncontrolandpoliticalstability(whoseimpactsaresignificantandnegative).Secon d,regardingthedevelopmentofthestockmarketinVietnam,theeffectsofsuchmacroec onomicfactorsaseconomicgrowth,domesticinvestment,foreigndirectinvestment,do mesticcredit,broadmoneysupply,stockmarketliquidity,andinflationaresignificantan dnegative,whereasthoseofallinstitutionvariables,includingcontrolofcorruption,go vernmenteffectiveness,politicalstability,regulatoryquality,ruleoflaw,andvoiceanda ccountability,aresignificantandpositive.Thisimpliesthatwell-

establishedinstitutionsarecrucialforpromotingademand forstocksand stockmarketperformanceinVietnam.

Keywords:

stockmarketdevelopment;macroeconomicfactors;institutions;two-wayGMM estimation

1 Introduction

Overtwopastdecades,stockmarketdevelopmenthassurgedasannoteworthy financialchanneltoraiselong-

runc a p i t a l i n developingcountries.Asa result,stockm a r k e t hasa considera blecontributiontolong-

runeconomicgrowth.Intheliterature,thedevelopmentofstockmarketisdet erminedbymanyfactors,andseveralempiricalstudieshaveinvestigatedthem acroeconomic determinantsofstockmarketdevelopmentindevelopingcount ries(Quartey&Gaddah,2007;El-N a d e r &Alraimony,2013;Evrim-

Mandacietal.,2013;Phan&Vo,2013;Shahbazetal,2015;Acquah-S a m , 2016).However,e m p i r i c a l resultsarestilldebatableduetotheinconsis tencyo f dataa n d empiricalestimators.Inaddition,therehavebeenveryfewinve stigationsintotheroleofinstitutionalqualityindeterminingstockmarketdevelop ment.

TheVietnamstockmarkethasbeendevelopedsinceearly2000swiththefirste stablishmentofstockexchangeinHoChiMinhCityandthelaterinHanoi.Ithasgro wnsharplyduringthelastdecadewithregardtotheincreasednumberoflistedfir msandtheimprovedmarketcapitalizationandliquidity.Currently,thereareover 800listedfirmsinthetwoexchanges.Furthergrowthofthes t o c k marketisex pectedastheVietnam’sgovernmentiscarryingoutpolicyreformsandr e s t r

u c t u r i n g o f them a r ke t tor a i s e f u n d s i n ordertomeetthed e m a nd f o r lon g-

runc a p i t a l i n Vietnam’si n d u s t r i a l i z a t i o n p r o c e s s However,theliterat ureo n determinantso f insightfuls t o c k m a r k e t developmentinVietnamis stilllimited.

Ourstudyismotivatedbythe

followingreasons.Thefirstmotivationisfromthehuge

literaturecentraltothequestionofwhethermacroeconomicfactorsaffect thed evelopmentofstockmarket(Evrim-

Mandacietal.,2013;Phan&Vo,2013;Shahbazetal,2015;Acquah-Sam,2016).Theconcernsthatinstitutionalqualitym a y resulti n thedevelopmen

to f stockmarketsa r e stressedbypolicym a k e r s , practitioners,andacademi cresearchers.RecentevidenceprovidedbyClaessensetal.

(2001),Gani&Ngassam(2008),Yartey(2010),Asongu(2012),andAyaydin&Balt aci(2013)supportstheargumentthatinstitutionalqualityiscrucialtothedevelo pmentofstockmarket.However,it

istheinconsistencyofdataandestimatorsthatrestrainsempiricalfindings.Anoth erisgeneratedfromtheVietnamesecontext.Differentaspectsofthestockmarket inVietnam,asanemergingmarketwheredeterminantsofstockmarketdevelopm entareinsightfullyunidentified,haverecentlybeenaddressedbyalimitednumbe rofstudies(Batten&Vo,2014;Vo,2015).However,thereisstillmuchtobedonetoi dentifytheeffectsofinstitutionalqualityandmacroeconomicfactorsonitsdevel opment.

Ther e s t o f thepaperi s structuredasfollows.Section2 r e v i e w s theliteratu rec o n c e r n i n g determinantsofstockmarketdevelopment.Section3introduc esthemodel,method,anddataforf u r t h e r empiricalanalysis.Section4prese ntsanddiscussestheresults.Finally,Section5concludesthestudy.

2 Literaturereview

Studieso n stockm a r k e t developmentc a n bec a t e g o r i z e d intothreemaj ors t r a n d s Thefi r s t f o c u s e s onthemacroeconomicdeterminantsofstock marketcapitalizationwhilethesecondinvestigatestheeffectsofinstitutionsond evelopmentofstockmarket,andthethirdexaminestheroleofFDIinflowsinstock marketdevelopment.

Giventhemacroeconomicdeterminantsofstockmarketdevelopment,mostinve stigationsascribethemacroeconomicfactorssuchaseconomicgrowth,savingr ate,investmentrate,developmentoffi n a n c i a l intermediaries,andcapital marketliquiditytothecriticaldeterminantsofstockmarketcapitalization.Quart eya n d Gaddah(2007)fi n d t h a t e c o n o m i c growth,c r e d i t toprivatesector, exchangerate,andgrossdomesticsavingshavepositiveeffectswhileinterestra tehasanegativei m p a c t onstockmarketdevelopmentinGhanaovertheperio dof1991-

2004,usingVECMinadditiontoJohansencointegrationtest.Usingthesameempir icalmodelasQuarteyandGaddah(2007),El-

N a d e r andAlraimony(2013)concludethatmoneysupply,capitalmarketliquid ity,investmentrate,inflation,andcredittoprivatesectorhavepositiveinfluence whilenominalgrossdomesticproductandn e t remittancesnegativelya ff e c t st ockm a r k e t developmenti n J o r d a n from1990to2011.Meanwhile,Evrim- Mandacietal.

(2013)analyzethekeydeterminantsofstockmarketdevelopmenti n 30advanc edandemergingcountriesduringtheperiodbetween1960andpre-

financial

globalmeltdown(2007)usingrandom-effectSURestimation.Theresultsshowthatcredittoprivatesector,f o r e i g n d irectinvestment,andremittancesareafewpositivedeterminantsofstockmarke tdevelopment.Similarly,PhanandVo(2013),applyingtheconstantcoefficients modelusingpooledOLSfor6SoutheastAsiancountriesovertheperiodof1990- 2008,recognizeeconomicgrowthrate,stockmarket,grossdomesticsavings,cre dittoprivatesector,M2moneysupply,andinflationchangeaskeydeterminantsofs tockmarketdevelopment.Accordingly,macroeconomicinstability(inflationchan ge)hasanegativeimpactwhiletheremainingvariableshavepositiveeffectsons tockmarketcapitalization.Conversely,theempiricalresultsfromShahbazetal (2015),whichemployVECMwithARDLboundstest,showthatinflationhasasignific antlypositiveimpactonstockmarketdevelopmentinPakistanfrom1974to20 10.Besidesinflation,economicgrowth,investmentrate,andcredittoprivatese ctorhavepositiveeffectswhiletradeopennessimpactsnegativelyonstockm a r

k e t development.Morerecently,usingStructuralEquationModelingapproach (SEM)forquarterlysecondarydataspanningfrom1991to2011inGhana,Acquah- Sam(2016)provideempiricalevidencethattheeffectso f investmentr a t e ande conomicgrowtho n stockmarketdevelopmentaresignificantlypositivewhilethe negativesignisfoundofinterestrates.

Inparallel,somestudiesofthisstrandalsofindthatfinancialintermediarydevelo pmentandstockm a r k e t capitalizationarecomplementsinsteadofsubstitute s.TheestimatedresultsfromGarciaandLiu(1999)usingFEMconfirmthatfinanc ialintermediarydevelopmentpositivelyenhancesstockm a r k e t development in15industrialanddevelopingcountriesduringtheperiodfrom1980to1995.More over,economicgrowthrate,savingrate,investmentrate,andstockmarketliq uidityarethe

positivedeterminantsofstockmarketdevelopmentinthesecountries.Withthes amemethodologyandresultsasGarciaandLiu(1999),BenNaceuretal.

(2007)showthatfinancialintermediariesandstockmarketsarecomplementsrat herthansubstitutesinthegrowthprocessin12MiddleEasternandNorthAfrican( MENA)countriesfrom1979to1999.Inaddition,BenNaceuretal.

(2007)alsoverifythatsavingr a t e , c r e d i t toprivatesector,stockm a r k e t liquid ity,andi n fl a t i o n changearesignificantdeterminantsofstockmarketdevelop ment.Meanwhile,CherifandGazdar(2010)i m p r o v e themethodologyintreat ingtheendogenousphenomenabetweenvariables.Throughthemethodso f IV- fixedeffectsandI V -

r a n d o m effects,theseauthorsc o n c l u d e thatther e l a t i o n s h i p betweenfin ancialintermediariesandstockmarketsiscomplementaryin14MENAcountriesd uring1990-

2007.Also,economicgrowth,savingsrate,credittoprivatesector,stockmarketli quidity,andinterestratehavesignificantinfluencesonstockmarketdevelopmen t.

Thesimilaritiesi n

theabove-mentionedstudiesliei n policyimplications.Accordingtotheseauthors,inordert opromotethestockmarketdevelopment,governmentsshouldencouragedome sticsavings,im prove capitalmarket liquidity,developfinancial intermedi aries,andcontrol inflation.

Unliketheabove-mentionedinvestigations,researchontheroleofinstitutionsinstockmarketde velopmenthasrecentlybeencarriedout.UsingestimationmethodsofGLS,fixedeff ects,andfixedeffectscorrectedforAR(1)errors forasample ofeightAsian countriesduring1996–2005,Gani

andN g a s s a m (2008)detectruleo f lawandp o l i t i c a l stabilityw i t h theirpo sitiveeffectswhilepoorregulatoryqualityandgovernmenteffectivenesshavene gativeimpactso n stockm a r k e t development.Moreover,economicgrowthan dtechnologydiffusionarethepositivedeterminantsofstockmarketcapitalizatio n.Theseauthorsemphasizetheprominentroleofinstitutionalqualityini m p r o v

i n g them a rke tpe rform a nc e Sim ila rly, Yartey(2010)showsinstitutional factorssuchaspoliticalr i s k , lawandorder,democraticaccountability,andburea ucraticq u a l i t y promotestockm a r k e t developmentviaenhancingtheviabi lityofexternalfinanceusing differencepanelGMMArellano-

Bondestimatorforapaneldatasetof42emergingeconomiesfortheperiodbetwe en1990and2004.Inaddition,somemacroeconomicfactors(economicgrowth,c redittotheprivatesector,grossdomesticinvestment,stockmarketliquidity)ha vesignificantlypositiveinfluencesonstockm a r k e t development.Meanwhile, Asongu(2012)arguethatthequalityofgovernmentinstitutionsfavorablyaffects stockmarketperformanceforapanelof14Africancountriesfrom1990to2010byu

s i n g instrumentalvariableestimationtechnique.Thesefindingsdemonstratec ountrieswithbettergovernmentinstitutionalenvironmentwillfavorstockmarke tswithhighervalueinsharestraded,highermarketcapitalization,betterturnove rratios,andthegreaternumberoflistedcompanies.

FDIisregardedasoneofthecriticalsourcestoeconomicgrowthanddevelopm entincountriesworldwide.AsregardstheroleofFDIinflowsinstockmarketdevelo pment,nearlyallpapersexceptf o r RazaandJawaid(2014)findthatFDIsignifican tlyimprovesstockmarketdevelopment.Claessense t al.

(2001)describeFDIasacomplement,notasubstitutefordomestic

stockmarketdevelopmentf o r asampleof77countriesinthe1975– 2000period,whereasJeffus(2004)indicatesthattheimpact

ofFDIinflowsonstockmarketdevelopmentissignificantlypositiveinfourLatinAm ericancountriesf o r theperiodof1988–2002.Similarly,Razaetal.

(2012)concludeFDIinflowsfosterstockmarketdevelopmentinPakistanove r t heperiodof1988-

2009 usingOLSestimation Meanwhile,AbdulMalik&Amjad(2013),adoptin gJohansenco-

integrationapproach,provideempiricalevidencetosupportthehypothesisofthe positiveroleofFDIinflowsinboostingstockmarketdevelopmentinPakistandurin g1985–2011.Recently,Razaetal.

(2015)employARDLboundtestingcointegration,DOLS,andFMOLStechniquesf oranalyzingtheannualtimeseriesdataofPakistanfrom1976to2011,alsofindi ngthatFDIhasapositiveimpactonstockmarketcapitalizationinbothlongandshor tterms.Conversely,theestimatedresultsfromRazaandJawaid(2014)demonstr atethatFDIhasasignificantlynegativeeffectonthestockmarketcapitalizationi nboththelongandshortrunbyapplyingtheVECMtechniquewithARDLboundtest for18Asiancountriesovertheperiodof2000–2010.

Apartfrominstitutionalquality,corruption,democracy,andtrustarealsodiffer entmeasuresofinstitutions.AyaydınandBaltacı(2013)confirmthenegativei mpactofcorruptionyetthepositivee ff e c t o f bankingsectordevelopmento

n stockmarketdevelopmentf o r a panelo f 4 2 emerginge c o n o m i e s between 1996and2011applyingfixede ff e c t s estimation.Theirempiricalfindingsattri

privatesector,inflationrate,moneysupply,e c o n o m i c growthrate,grosss avings,FDIinflows,andrealinterestratetosignificantdeterminantso f stockmar

therandomeffectsGLSmethodforasampleof22Africancountriesfrom1985thro ugh2011,BiswasandOfori(2015)explorethecontributionofdemocracyandcon stitutionallimitsonthenumberofyearsachiefexecutiveallowedtoservetosig nificantlyimprovedstockmarketdevelopment.Farmorelately,Ngetal.

(2016)usetherelevanceo f socialcapitali n stockm a rk e t developmentasa pro xyfo r socialinstitutions(trust).ThroughBayesianmodelaveraging(BMA)applie dto37variablesacross60countriesfrom2000to2006,theyfindthattrustisaposi tivedeterminantofstockmarketdevelopmentandalsothemostrelevantcompon entofsocialcapitalinma rket development.Macroeconomicinstability(inflati onarychanges)hasanadverseimpactontrustinthetradingofstock.Moreover,th eirestimatedoutcomesi l l u s t r a t e theassociationbetweensocialc a p i t a

l , particularlytrust,andm a r k e t developmenti n a ffl u e n t countrieswithlow erformalinstitutionalenvironment.

Inshort,alongsidedifferentperspectivesasfoundwithexistingliterature,sofa rtherehasbeenlittleuseofthesystempanelGMMArellano-

Bondininvestigatingtheeffectsofmacroeconomic factors,FDI,andinstituti onsonstockmarketdevelopmentforalargesampleofdevelopingcountriesalone Thisisalsotheresearch gaptobesignificantlyfilled.

3 Empiricalmodel,researchmethod, anddata

BasedonthestudyofYartey(2008),thisstudyusesthefollowingequationtoex ploredeterminantsofstockmarketdevelopmentindevelopingcountries:

CAPit  0 1CAPit1 2Xit

croeconomicdeterminantsofstockm a r k e t development,whichisselectedas follows:

Economicgrowth(realGDPpercapita)

(GDP):GarciaandLiu(1999)andYartey(2010)notethattherealincomepercapitai

spositivelyassociatedwithstockmarketsize.Viathestockmarketsomefactorsca npromotetherealincome.Highincomegrowthinturnenhancesstockmarke tdevelopment.

Grossdomesticsavingsandinvestment(INV):GarciaandLiu(1999)arguethatl

ikefinancial intermediaries,stockmarketsw i l l mobilizesavingstowardinvest mentprojects.Thelargerthesavings,thehighertheamountofinvestmentcapitali smobilizedviastockmarkets.

Financialintermediarydevelopment:Thisislikelytobedefinedbydomesticcr edittoprivatesector(CRE)andbroadmoneysupply(MO2).AccordingtoGarciaan

dLiu(1999),thebankingsectorandstockmarketsc a n beeithersubstituteso r co mplementsbecausetheybothmobilizegrossdomesticsavingstowarddifferenti nvestmentprojects.

Stockmarketliquidity(LIQ):Liquidityisoneofthemainfunctionswhichstockma

rketsprovide.Manyhighprofitinvestmentprojectsneedalong-runcommitmentofcapital,whichleadstohighdefaultandliquidityrisks(Garcia& Liu,1999).Thus,liquidstockmarketshelpinvestorschangetheirportfoliosquick lyandwithlowcosts,whichmakesinvestmentlessriskyandmoreprofitable.Cons equently,themoreliquidthestockmarket,thelargeramountofsavingscouldbera ised.

Macroeconomicstability:Thisi s measuredbyinflation(INF).Macroeconomic

stabilityc a n contributeimportantlytostockm a r k e t development.Garciaand Liu(1999)arguethathighervolatilityoftheeconomicsituationisattributedto lessparticipation of incentivefirmsandsaversin

thestockmarket.Inaninstablemacroeconomicenvironment,itishardtopredictpr icechanges,andthusthestockmarketbecomesmoreuncertain.

Institutionalquality:Pagano(1993)documentthatregulationsandinstitution

salsoaffect thee ffi c i e n c y ofstockmarket.Disclosureofinformationabout thebusinessfromfirmsissupposedtoattractinvestorstoparticipateinthecapital marketandenhancethecapitalmarketdevelopment.

Thisstudyappliestwo–

stepsystemGeneralizedMethodsofMoments(GMM)toestimateEq.1aandEq.1 b.Indeed,inestimatingEq.1aandEq.1bthereisaseriousdifficultythatariseswit hfixedeffectsmodelinthecontextofadynamicpanelwithalaggeddependentva

samplebiasinvolvedinestima ting thecoefficientofthelaggeddependentvaria

ble,whichmaybenotmitigatedbyincreasingN (Nickell,1981).Iftheregressorsare

correlatedwith thelaggeddependentvariabletosomedegree,theircoefficients maybeseriouslybiased.Moreover,itisespeciallyproblematicinthecaseo f data

asmalltimedimension.Cross-sectionestimateswouldproducea biascausedbythecorrelationbetweenthelag geddependentvariableandtheunobservedindividualeffectsasthepresentvalu eofthedependentvariableitselfwouldbedependentontheindividualeffects,whi chm a y disappearin

samplesw i t h largetimedimension.Analternativei s tou s e anytypeo f fi x e d e

ff e c t

technique,eliminatingtime-independenteffectsbytakingsomekindofdifference(e.g.,firstdifferences,within grouptransformations,etc.).Bytakingfirstdifferencesthefixedindividualeffectisre movedbecausei t doesnotvaryovertime.Inthiscase,however,theerrortermwou ldhavesomelagsandthereforew i l l becorrelatedwiththelaggeddependentva riable,leadingtobiasedestimates.Severalmethodshavebeenproposedi n earli erliterature(e.g.,Anderson& Hsiao,1 9 8 2 ; Arellano& B o n d , 1991;Blundell&B ond,1998).

ArellanoandB o n d (1991)proposethatdifferenceGMMestimatori s m o r e e ffi c i e n t thantheAnderson& Hsiao’s(1982)e s t i m a t o r GMMestimatordeals betterw i t h endogneity,heteroskedasticity,ands e r i a l correctionbecausei t i

s specificallydesignedtocapturethej o i n t endogeneityo f someexplanatoryva riablesthroughthec r e a t i o n o f a weightmatrixo f internalinstruments,whicha ccountsforserialcorrelationandheteroscedasticity.GMMestimatorrequireso n

e setofinstrumentstohandleendogeneityandanothersettodealwiththecorrel ationbetweenlaggeddependentvariableandtheerrorterm.Theinstrumentsinc ludesuitablelagsoftheendogenousvariablesandthestrictlyexogenousregress ors.Thisestimatortechniqueeasilygeneratesm a n y instruments,sincebyperi

odT allpriorlagsmightbeindividuallyconsideredinstruments.However,abigpro

blemoftheArellano-BonddifferenceGMMestimatorliesinthefactthatthevarianceoftheestimatescoul

dincreaseasymptoticallyandcreateconsiderablebias.BlundellandBond(1998)an dBlundelletal.(2001)showthatestimationin firstdifferenceshasalargebias

andlowprecision,eveninstudieswithlargenumberofindividuals(N).Thesystem GMMestimatori s likelytoexhibitthebestfeaturesintermsofsmallsamples.Prov idedthatseriesaremoderatelyorhighlypersistent,systemGMMestimatorwilldi splaythelowestbiasandhighestprecision(Soto,2009).

ThesystemGMMestimatorrequiresmomentconditions,whicharespecifiedon theregressione r r o r s Themomentconditionsassumptionisthatinstrumen tsareexogenous.Forthis,themomentso f theerrorswithinstrumentsareequalt ozero.InsystemGMMestimator,thechoiceofinstrumentsandregressorsineach equationshouldbecarefullyconsidered.Sinceanequationmaybeunder-

identified,exactlyidentified,andover-identifieddependingonwhetherthenumberofinstrumentsi n thatequationarer espectivelylessthan,equalt o o r greaterthanthato f theregressorstobeestimat ed.Forthetwo-

stepsystemGMM,thisestimatorismoreasymptoticallyefficient stepestimatorduetousingasuboptimalweightingmatrix,butitproducesthebias ofu n c o r r e c t e d standarde r r o r s wheni n s t r u m e n t c o u n t i s high.I n t hisrespect,Roodman(2009)providesaruleofthumbthatthenumberofins tru

thantheone-m e nts shouldbelessthan thatofindividualdithantheone-mensions(N).

InsystemGMMestimation,SarganandHansentestshaveanullhypothesisthat“t

heinstrumentsa r e

exogenous.”Therefore,thehigherthep-valueofSarganandHansenstatistic,thebetteritistoacceptthisnullhypothesis.T heArellano-

Bondtestforautocorrelationhasanullhypothesisofnoautocorrelation,andther eforeisappliedtodifferencederrorterms.ThetestforAR(2)processinfi r s t di fferencesusuallyrejectsthenullhypothesis.ThetestforAR(2)ismorematerial,since itdetectsautocorrelationinlevels.

Cross-sectionsandtimeseriesareextractedtoaccommodatetheunbalancedpaneld ataof36developingcountries(20inAsia1,10inLatinAmerica2,and6inAfrica3)o vertheperiodof2003–

2014fromWorldDevelopmentIndicatorofWorldBankandWorld Economic OutlookofInternationalMonetaryFund.Somemissingvaluesofthedatasetinso mecountriesarefilledwithr e f e r e n c e towww.tradingeconomics.comandw ww.indexmundi.com.Wedefineandcalculatethevariables asfollows:

CAP:stockmarketcapitalization

asaproxyfordevelopmentofstockmarket(%ofGDP)

1Bahrain,

China,India,Indonesia,Iran,Kazakhstan,Kuwait,Lebanon,Malaysia,Mongolia,Nepal,Oman,Pakistan,Philippines,Qatar,SaudiArabia,SriLanka,Thailand,UnitedArabEmirates,andVietnam

2Argentina,

Bolivia,Brazil,Chile,Colombia,CostaRica, ElSalvador,Mexico,Panama,andPeru

3Egypt,

Ghana,Kenya,Mauritius,Nambia,andNigeria

PoliciesandSustainableEconomicDevelop ment |12

GDP:realGDPpercapita,

aproxyforeconomicgrowthofacountry(thisvariableisusedinthef o r m ofnatura llogarithm)

Thestatisticalvaluesareyearsof1996,1998,and2000,andfrom2002to2014 Missingvalues(1997,1999,and2001)arefilledbythesumo f averagevalueo f pre cedingandfollowingyears.StatisticaldescriptionofallvariablesispresentedinTa ble1.

marketdevelopment,suchas

economicgrowth(GDP),domesticinvestment(INV),foreigndirectinvestment(FD I),domesticcredit(CRE),M2moneysupply(MO2),stockmarketliquidity(LIQ).Ou

rfindingsareinteresting.First,domesticinvestmentandFDIbothhavenosignific

anteffectsonstockmarketdevelopment,whiletheirpositiveeffectsarefoundby Garcia&Liu(1999),Claessensetal.

;Razaetal.,2015;Shahbazetal.,2015;Acquah-Sam,2016).Economicgrowthresultsfromhighhouseholdsavingsratesandincre asedlaborforceparticipation,

aswellastechnologicalinnovation.Increaseddemandforproductionin pu ts ( capital,labor,technology)arisesforne wly establishedenterprises,leadingtoa

nincreaseinstockmarketcapitalization.Third,thecoefficientofdomesticc r e d

i t issignificantlypositive,assupportedbyGarciaandLiu(1999),Yartey(2010),El -NaderandAlraimony(2013),andShahbazetal.(2015).

Thisresultshowsthatahigherlevelofdomesticcredittoprivatesector(CRE)isrela tedtohighergrowthofstockmarketcapitalization,whichimpliesthatthereexists acomplementaryrelationbetweenthebankingsectorandthestockmarketindevel opingcountries.Infact,indeveloping countriescapitaldemandcouldrise, whereastheir

bankingsector’sdevelopmenti s n o t healthye n o u g h tosatisfythisneed.Thus, theprivatesectori n developingcountriesisalsotorelyonfundingfromthestoc

kmarket,whichinturnalsoneedsfundingforinvestmentprojects.Fourth,broad

moneysupply(MO2)hasasignificantlynegativeeffectonstockm a r k e t capita lization,whichisoppositetothefindingsofGarciaandLiu(1999),CherifandGazda r( 2 0 1 0 ) , AyaydınandBaltacı(2013),El-

NaderandAlraimony(2013),andPhanandVo(2013).Thenegativeassociationb etweenbroadmoneysupplyandstockmarketcapitalizationimplies thatapo sitivem o n e y supplyshockw i l l leada decreaseininterestr a t e Ast h e interest

r a t e declines,enterpriseswillseekadditionalborrowingsfromfinancialinstitutio nsduetotheirlowercosts,whichcausesadeclineinstockmarketcapitalization Thisshowsthatdevelopingcountriesrelyheavilyonfi n a n c i a l sectorstoprovi decreditforeconomicactivitiessincetheirstockmarketcapitalizationsarestill quite smallincomparisonwithcapitaldemand.Fifth,the coefficient ofstockmarketliquidityissignificantlypositive,whichisinagreementwithGarci aandLiu(1999),BenNaceuretal.

ment.Increasedinflationleadstomacroeconomicvolatility;asaresult,firmsandi nvestorshavenomoreincentivestoparticipateinthestockmarket.

PoliciesandSustainableEconomicDevelo

Table2

Macroeconomicdeterminantsofstockmarketdevelopment:Thecaseofdevelopin gcountries

0.024

0.027 (0.106) (0.09

8)

(0.070 ) Foreigndirectinvestment -

0.168

-0.113 (0.14

7)

(0.145 ) Domesticcredit 0.332**

*(0.06 2)

-0.205**

*(0.05 Stockmarketliquidity 0.250***

(0.019 )

-1.269*

**(0.11 Constant -

51.046***(6 465)

23.96

-5***(6.

12.63

3*(7.2 53)

4

0.124 0.292 Hansentest 0.15

estimators.O u r findingsprovidenovelempiricalevidenceoftheimpactofinstit utionalqualityonstockmarketdevelopment.InModel1,thecoefficientofcontrolo fcorruption(IN1)issignificantlynegative,whichi s differentfromthestudiesofG aniandNgassam(2008),Yartey(2010),andAsongu(2012).Thiss h o w s thatani mprovementincontrolofcorruptionmaycauseinvestors’reducedrequiredret urno n equityandriskpremium.Ourresultisinsupportoftheideathatcorrupti onislikelytobeanecessarylubricanttospurstockm a r k e t developmenti n dev elopingcountries.Asarguedby

Swaleheen(2011)andDzhumashev(2014),corruptionm a y facilitategrowthby helpingfi r m s sidestepburdensomepublicpolicies.InModel2,wemeasurethee ffectofgovernmenteffectiveness(IN2)onstockmarketdevelopment.Effec tiv

e government,whichenhancesthequalityofpolicyf o r m u l a t i o n andimplem entationandthecredibilityo f thegovernment'scommitmenttosuchpolicies,sho uldbepositivelyrelatedtostockmarketdevelopment.Thisresultreinforcestheidea thatgovernment effectivenesssignificantly andpositivelyaffectsstockmarket development.InModel3,theeffectofpoliticalstability(IN3)onstockmarketdevel opmentistested.Theresultshowsthatthec o e ffi c i e n t ofpoliticalstabilityis significantlynegative,whichisinlinewiththestudyofGoldsmith(1987)toshedlig htonMancurOlson’stheoryofpoliticalstabilityandgrowth.InModel4,welookatt heeffectofregulatoryquality(IN4)onstockmarketdevelopment.Regulatoryqual itydisplaysthecapacityofgovernmentinformulatingandcarryingoutsoundpoli ciesandregulationstopromoteprivatesectordevelopment,andthereforei t sho uldbepositivelyassociatedw i t h stockm a r k e t development.

exertsastatisticallyinsignificantandpositiveeffectonstockmarketdevelopme ntindevelopingcountries.InModel5,weexaminetherelationofruleoflaw(IN5) withstockmarketdevelopment,findingthatitissignificantandpositive.Thisim pliesthattheruleoflawisanotherdeterminantofstockmarketdevelopmentandt hatitsimprovementcausesareductioninstockmarketrisks,facilitatingmoreinve stmentinequityandhigherreturnsindevelopingcountries.InModel6,theeffecto fvoiceandaccountability(IN6)o n stockmarketdevelopmentisinvestigated.T heresultindicatesthatthecoefficient ofvoiceandaccountabilityi s positiveyet statisticallyinsignificant,i m p l y i n g thatimprovementi n voiceandaccountabil ityis no t attributedtoanyimprovementin stockm a r ke t performancein develo pingcountries.

Table3

Theeffectsofinstitutionalqualityonstockmarketdevelopment:Thecaseofdevelop ingcountries

Dependentvariable:Stockmarketcapitalization(%ofGDP)

Mode l1(IN 1)

Model 2(IN 2)

Model 3(IN 3)

Model 4(IN 4)

Model 5(IN 5)

Model 6(IN 6) Stockmarketcapital.(-

1)

0.466*** 0.566*** 0.467*** 0.455*** 0.551*** 0.341***

(0.042) (0.033) (0.066) (0.043) (0.033) (0.035) LogGDPpercapita 2.644** 2.567*** 4.470*** 1.619* 3.866*** 2.487***

(1.034) (0.665) (1.409) (0.839) (0.419) (0.677) Domesticinvestment -0.005 -0.074 -0.003 -0.103 -0.140*** -0.074

(0.081) (0.046) (0.072) (0.077) (0.040) (0.116) Foreigndirectinvestme

nt (0.164) -0.039 (0.129) -0.169 0.111 (0.400) (0.131) -0.035 (0.126) -0.164 (0.192) -0.111 Domesticcredit 0.464*** 0.117*** 0.316*** 0.371*** 0.200*** 0.526***

(0.068) (0.029) (0.113) (0.060) (0.040) (0.090)

Mode l1(IN 1)

Model 2(IN 2)

Model 3(IN 3)

(0.060) (0.024) (0.089) (0.054) (0.030) (0.074) Stockmarketliquidity 0.191*** 0.166*** 0.232*** 0.223*** 0.039*** 0.303***

(0.037) (0.172) (0.022) (0.031) (0.017) (0.026) Inflation -1.229*** -0.853*** -1.007*** -1.153*** -0.835*** -

1.182***(0.139) (1.612) (0.243) Institutionalquality -4.917** 4.056** -6.720** 1.117 3.733*** 0.064

(2.386) (1.612) (2.625) (2.068) (1.120) (2.122) Constant 1.861 2.866 -16.384 13.843 -4.764 14.029**

(9.069) (5.348) (13.547) (8.258) (4.052) (5.906) Obs 360 396 396 360 396 396 No.ofinstruments 32 36 27 32 36 35 No.ofgroups 36 36 36 36 36 36 AR(2)test 0.178 0.173 0.174 0.195 0.205 0.271 Sargantest 0.290 0.102 0.366 0.241 0.545 0.102 Hansentest 0.289 0.218 0.158 0.256 0.204 0.258

Notes:***,**and*denote significanceat1%,5%,and10%respectively;standarddeviationisinpar

Table4

MacroeconomicdeterminantsofstockmarketdevelopmentinVietnam

Dependentvariable:Stockmarketcapitalization(%ofGDP)

Model 1(vnD_g dp)

Model 2(vnD_i nv)

Model3(

vnD_fdi) (vnD_m Model4

o2)

Model 5(vnD_

cre)

Model6(

vnD_liq) 7(vnD_ Model

inf) Stockmarket 0.389*** 0.346*** 0.360*** 0.328*** 0.327*** 0.376*** 0.395***

capital.(-1) (0.041) (0.039) (0.040) (0.041) (0.039) (0.041) (0.042) LogGDPper 1.790* 2.594** 2.422** 2.818** 2.896*** 2.429** 2.207**

capita (0.960) (1.013) (1.021) (1.118) (1.066) (0.946) (0.876) Domestic 0.024 -0.029 -0.017 -0.043 -0.050 -0.022 -0.003 investment (.069) (0.069) (0.074) (0.077) (0.074) (0.067) (0.071) Foreigndirect -0.027 -0.031 -0.040 -0.016 0.0005 -0.032 -0.098 investment (0.143) (0.165) (0.164) (0.170) (0.171) (0.155) (0.164) Domesticcred

it

0.333*** 0.425*** 0.421*** 0.444*** 0.434*** 0.403*** 0.384***

(0.065) (0.067) (0.064) (0.067) (0.069) (0.063) (0.066) M2money -0.163** -0.249*** -0.246*** -0.256*** -0.248*** -0.246*** -0.227***

supply (0.063) (0.058) (0.056) (0.061) (0.062) (0.056) (0.056)

0.264***( 0.021)

0.269***( 0.021)

0.268

***(0.

021)

0.262***( 0.021)

0.252***( 0.019) Inflation -1.175*** -1.157*** -1.158*** -1.141*** -1.131*** -1.210*** -1.169***

(0.108) (0.106) (0.108) (0.106) (0.105) (0.109) (0.111) vnD_X -4.137*** -0.546*** -2.453*** -0.149*** -0.177*** -1.034*** -

1.019***( 1 1 3 8 ) (0.078) (0.403) Constant 11.224 8.482 8.880 7.144 6.644 9.355** 9.651

(7.909) (8.447) (8.333) (8.916) (8.727) (8.037) (7.550) Obs 396 396 396 396 396 396 396 No.of

34 34 34 34 34 34 34 instruments

No.ofgroups 36 36 36 36 36 36 36 AR(2)test 0.233 0.250 0.248 0.259 0.259 0.235 0.233 Sargantest 0.612 0.280 0.280 0.279 0.281 0.278 0.290 Hansentest 0.600 0.107 0.113 0.110 0.112 0.105 0.121

relatesignificantlyandnegativelytoVietnam’sstock

marketdevelopment.InModel6,theeffectofstockmarketliquidityonstockmarke tdevelopmentiscapturedforthecaseofVietnam.S i n c e thecoefficientofstockm arketliquidityissignificantandnegative,anincreaseinstockmarketliquiditycann otimprovestockmarketdevelopmentinthecountry.Model7highlightstheimpact of

inflationonstockmarketdevelopment,demonstratingitssignificantandnegati veassociationwiththedevelopmentofstockmarketinVietnam.

Next,weexploretheimpactofinstitutionalqualityonstockmarketdevelopm entinVietnam.S i m i l a r l y , weintroduceadummyvariableforthecaseofVietn am,andcombineitwithinstitutionsvariables,suchascontrolofcorruption(IN1),go vernmenteffectiveness(IN2),politicalstability(IN3),regulatoryquality(IN4),rul eoflaw(IN5),andvoiceandaccountability(IN6).Thesecombinationsgeneratesix newvariablestoconsistofvnD_in1,vnD_in2,vnD_in3,vnD_in4,vnD_in5,andvnD _in6.S i x modelsw i t h e a c h r e g r e s s i o n havingo n e o f thesevariablesares equentiallyestimated.Theestimatedresultsassummarizedi n Table5 suggestt hattwoindicatorsofinstitutionalqualitydetectedinSection5.2asdeterminantsof stockmarketdevelopmentindevelopingcountriesarethesameasthosefortheca seofVietnam,beinggovernmenteffectivenessandruleoflaw.InModel2,govern menteffectivenesscontributessignificantlyandpositivelytoexplainingstockm arketdevelopmentinVietnam.Furthermore,theeffectofruleoflawisfoundtobesi gnificantandpositivei n Vietnam(Model5).

However,differencesexistbetweenthecircumstancesofVietnamanddevelop ingcountrieswithr e s p e c t totheeffectsofotherindicatorsofinstitutionalqu alityonstockmarketdevelopment.InModel1,wefindthattheimpactofcontrolofc orruptiononstockmarketdevelopmentinVietnamispositiveandsignificant,con firmingtheirtightlinkageforthecaseofVietnam.Animprovementinc o n t r o l o fcorruptionwillaccordinglyenhancestockmarketperformance.TheresultofM odel3showsthatpoliticalstabilityhasa significantlypositivee ff e c t o n stockma rketdevelopmenti n Vietnam,suggestingthatpoliticalstabilityisalsoakeydeter minantofstockmarketdevelopment.Regulatoryq u a l i t y h a s a p o s i t i v e e ff e

c t o n Vietnam’ss t o c k m a r k e t development(Model4 ) T h i s i m p l i e s thatg oodregulatoryqualityiscrucialtothedevelopmentofstockmarketinVietnambeca usei t reducespolicyriskandstimulatesdemandforstocks.InModel6,wefindthatt hecaseofVietnamwitnessesthepositiveimpactofvoiceandaccountabilityonsto ckmarketdevelopment.Thissuggeststhathigherlevelofaccountabilityderivedf romfurtherencouragementoffreemediaandtransparencyplays amajorrole

Model2 (vnD_in 2)

Model3 (vnD_in 3)

Model4(v nD_in4) Model5 (vnD_in

5)

Model6 (vnD_in 6) Stockmarketcapital.(-

1)

0.377*** 0.394*** 0.489*** 0.388*** 0.485*** 0.267***

(0.041) (0.032) (0.060) (0.042) (0.039) (0.025) LogGDPpercapita 3.534*** 2.977*** 4.123*** 2.254** 2.250* 2.898***

(1.198) (1.265) (1.343) (0.965) (1.213) (0.742) Domesticinvestment -0.049 -0.053 0.016 -0.126 -0.134** -0.104

(0.086) (0.069) (0.072) (0.093) (0.050) (0.0118)

Model1 (vnD_in Model2 (vnD_in Model3 (vnD_in Model4( vnD_in4) Model5 (vnD_in Model6 (vnD_in Foreigndirectinvestment 0.025 -0.077 0.106 -0.022 -0.154 -0.011

(0.186) (0.116) (0.381) (0.146) (0.109) (0.199) Domesticcredit 0.541*** 0.232*** 0.300*** 0.470*** 0.295***

0.638***(0.068)

(0.054) (0.103) M2moneysupply -0.314*** -0.159*** -0.201** -0.266*** -0.158*** -

0.465***(0.066)

(0.043) (0.081) (0.062) Stockmarketliquidity 0.193*** 0.249*** 0.234*** 0.229*** 0.066***

0.311***(0.043) (0.018) (0.022) Inflation -1.105*** -1.007*** -0.995*** -1.077*** -0.871*** -1.151***

Institutionalquality -4.794* 8.222*** -6.508** 0.488 6.227***

-0.987(2.518) (2.666) (2.630) (2.204) VNinstitutionalquality 26.011*** 34.937*** 1.055* 22.609*** 24.593***

11.888***(3.041) (8.574) (14.732) (4.399) (4.807) (3.086)

Constant -3.952 6.777 -14.650 8.591 10.306 12.449*

(10.525) (10.633) (13.314) (9.185) (11.097) (6.236) Obs 360 396 396 360 396 396

No.ofinstruments 33 36 28 33 36 36

No.ofgroups 36 36 36 36 36 36

AR(2)test 0.207 0.234 0.175 0.220 0.160 0.311 Sargantest 0.275 0.316 0.357 0.222 0.130 0.112 Hansentest 0.285 0.217 0.198 0.264 0.224 0.216

Dependentvariable:Stockmarketcapitalization(%ofGDP)

(0.133) (0.139) (0.24

5)

(0.1 14)

(0.1 11)

2014.Foranother,itexploresdeterminantsofstockmarketdevelopmentinVietna mandthencomparesthemw i t h thoseindevelopingcountriesinordertowellund erstandthecaseofVietnam.

Regardingmacroeconomic factorsindevelopingcountries,thestudyfind

sinterestingresults.First,economicgrowth,domesticcredit,andstockmarketliq

uidityarepositivedeterminantsofthedevelopmentofthestockmarketindevelo pingcountries.Wedocumentthat:

(i)initialeconomicgrowthiscriticaltostockmarketperformance;

(ii)animprovementindomesticcredittoprivatesectorpromotesstockmarketd evelopment,implyingthatthereexistsacomplementaryrelationshipbetweenban

kingsectorandstockmarketindevelopingcountries;and(iii)themoreliquidthesto ck

stockmarketdevelopmentisnegative,suggestingthatfurthersoundmoneyandi nterestr a t e policyshouldbeadequatelyadoptedtosupportthegrowthofthema

rket.Third,institutionalfactors,suchasgovernmente ff e c t i v e n e s s andruleo f

law,impactsignificantlyandpositivelyonstockmarketdevelopment,implyingt hatthesefactorsarecrucialtothedevelopmento f stockmarketindevelopingc ountries.Meanwhile,corruptioncontrolandpoliticalstabilityaref o u n d toha veasignificantandnegativeeffectondeterminingstockmarketdevelopment Thereareconsiderabledifferencesi n explainingthedevelopmento f stockm

a r k e t betweendevelopingcountriesandVietnam.First,theimpactsofmacroe

conomicfactors,suchaseconomicgrowth,domesticinvestment,foreigndirectin vestment,domesticcredit,broadmoneysupply,stockm a r k e t liquidity,andin flationaresignificantbutnegativeonthedevelopmentofstockmarketinVietna m.Nevertheless,theeffectsofdomesticinvestmentandforeigndirectinvestme ntarei n s i g n i fi c a n t , whereasthoseo f e c o n o m i c growthandstockm a

r k e t liquidityaresignificantandpositivef o r thec a s e ofdevelopingcountries.S econd,allinstitutionalfa c t or s , suchasc o n t r o l o f corruption,governmenteffe

ctiveness,politicalstability,regulatoryquality,ruleoflaw,andvoiceandaccounta bilityarepositivedeterminantso f thedevelopmento f stockm a r k e t i n Vietnam ,whichi m p l i e s thatwell-

establishedinstitutionsarecrucialtopromotingdemandforstocksandimproving Vietnam’sstock marketperformance.

ateS e c t o r withPublicSectoraroundtheGlobe(Researchin Finance,Volume31)EmeraldGroupPublishingLimited,31,65–86.