کی تمام اشاعتیں۔ Muhammad Abdulrehman . کراچی ، Pākistān

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How Does the Market Competition Moderates the Impact of Governance Indicators on Stock Market Performance

Abstract


The aim of this paper is to explore the moderating effect of market competition on the relationship between the governance indicators and stock market performance. Data of 110 countries have been taken as sample for the period spanning over from 2007 to 2016. For this purpose data is divided into three subpanels as high income level, middle income level and low income level. Ordinary Least Square (OLS), Random Effect Model, Fixed Effect Model and Prais-Winsten regression estimation is used to analyze the data. In the previous studies effect of governance indicators on the SMP have been widely discussed but no attention has been paid to the effect of market competition on the relationship between governance indicators (GE, PS and RQ) and SMP. Our data analysis supports two hypothesis (1) high quality governance increase the performance of the stock market and that (2) this effect is even stronger when there is high market competition. Moreover, we find positive effect of market competition along with government effectiveness and regulatory quality on SMP. However, market competition along with PS has negative impact on SMP. This study provides some guidelines to policy maker, investors and researchers.

Key words: Stock Market Performance; Market competition; governance indicators; GDP; Market size



Introduction

The performance of stock market is an essential element to analyze the financial condition of the country. A wide range of literature is available which demonstrates that stock market performance (SMP) of a country improve overall economic growth and human wellbeing (Olweny & Kimani, 2011; Sraer & Thesmar, 2007; Pfeffer, 2010; Castriota, 2007). Both primary and secondary investors get benefits when stock market rises with even a few points. Stock markets provide an easy mechanism for central entry by investors and stakeholder, thus, constant liquidity is mandatory. Liquidity can be maintained with adequate size and volume of transaction in the capital market. An efficient stock market may expand the resources, increase domestic resource mobilization and attract foreign portfolio especially for developing countries. Although it is factual that SMP plays a vital role in enhancing growth. Literature is still confused on the phenomenon that what determines SMP. Till date, especially in the context of cross-country analysis, researchers have tried to search the impact of macro-economic variables and governmental influences on SMP (Kyereboah-Coleman & Agyire-Tettey, 2008; Gay, 2016; Humpe & Macmillan, 2009; Hondroyiannis & Papapetrou, 2001); however, the literature is scarce related to the result of market competition on the performance of capital market.

A number of cross country contemplates for instance, Durnev & Kim (2005), Bruno & Claessens (2010), Fraj & Maktouf (2018), presented that successful operations of outlay movement boosts economic growth which in result depends on framework of governance of a country. Generally, the organizations are not working in vacuum as governance indicators affect them and market competition in which firms are operating. Stock market depends upon the important decision of government. For instance, the US representative's house voted against the Treasury-Federal Reserve's proposed bill for bailouts with a view to supplying more liquidity to disturbing US trade economies on 29 October 2008. Global stock market responded an increase of 17% within two hours of declaration. Furthermore previous Studies such as Darley, (2012) and Hooper, (2009) reveal that the operations of financial and capital market are affected by quality of country governance. Moreover Mckinnon and Pill (1997) reveals that financial volatility and financial profits are responsibility of the governments.

Market is a place in which buyers and sellers can buy and sell their products and resources. So, the most important factor in the market that plays a significant role is the element of competition and element of competition is always created by the imbalance of demand and supply. Higher demand for the product of the company creates higher competition between the firms. Market competition has positive effect on SMP because stock returns are affected by the intensity of market competition. Gaspar andMassa (2005) and Irvine and Pontiff (2005) suggested that more competitive firms have more stock returns. The firms having the more market powers are earning the more profit from their stock because such type of firms have high returns on their stock and this condition of the firms encourage the investors to make more investment. Furthermore, the volatility of such firms is less because of more market powers and this situation make the firm’s profit less risky as it explained in imperfect market competition.

Hoberg and Phillips (2009) suggested that the high industry level stock market valuation decrease the return on stock because of high level of competition. In fact, there is logical reason behind this phenomenon because firms perform a series of activities and these set of activities comprises on market research, financing from investors, engage in production and finally selling their products to consumer. So market competition affects the behavior of firms in each of above said activities.

Stock market provides assessment to investors for their future moves. When the general perception of stock market is positive it indicates good performance of the stock market and if it is inverse it shows decline in the stock market. Stock market is a vote of confidence; a crash can reduce the economic growth and a boom can boast up the economic growth. Boom of 2009 and 2018 of American stock market are the best examples. These two boom season show that stock market, has increased 300% since 9 march 2009. In this period US Economic output has increased by 40% and rate of wages increase only 23%. Crash of 2000, 2007, 2009 and 2015 of different countries stock markets slow down the economic growth of affected countries and also the overall world. In 2015 US stocks lost $2.1 billion in value which eliminate all the gain of markets. SMP affects every consumer whether he directly invest in the company or not. When the stock market is down then individuals and firms suffer a lot. However, before making an investment, investors consider several macro-economic, social and political factors.

Although there is some literature related to the effect of macro-economic variables and government factors on the SMP, there is little known phenomenon that how market competition influence stock market development. Previous studies reveal that law and quality of their enforcement is essential for governance and SMP (Giannetti and Koskinen, 2012). The observed cross countries differences in governance indicators and SMP may be explained by a single factor that is difference in law and its enforcement (La Porta 1997, 1998). According to researchers countries having sound governance indicators may attract the foreign investors more as compare to those countries having the poor governance quality.

Many economists suggested that market competition and governance indicators are two main factors which are affecting the SMP because in absence of market competition the performance of the firms are low as compared to the performance of those firm where exist the concept of competition Allen and Gale (2000). Hermalin (1992) suggested four mechanism of market competition that influences the management performance. These are an impact of enhanced data when faced with competing companies, a shift in returns on management effort, an impact of risk adaptation if the risks of profit differ according to competition level and the impact of decreased revenues in a more competitive envirnment. According to Hermalin if income affects positively then due to other three affects agency cost become low with the impact of market competition. Peress (2010) suggested that the organizations having market power will attract the investors more as compared to the more competitive industries and in this way more of this information is associated about the prices of stock market for firms with better degree of market power. So, in this way investment efficiency of the firms increased and that in result increase the firm profit. Hoberg and Phillips (2010b) study reveal that the analysts are more partial in competitive organizations which in result decrease investment efficiency and stock prices. Vives (2008) considered various models for the reduction of cost. He finds authentic backing for competition dynamic invention events. Positive stock return relation to competition has been found by the Hou and Robinson (2006). In the light of aforementioned academic literature, it is believed that market competition moderates the relationship between governance indicators and SMP. The parsimonious model presented in this study can help market players to improve industrial performance of a country.

1.1 Research Question

Following are the research questions of this study:

1. Is there any effect of governance indicators on SMP?

1.1 Is there any effect of governance indicators on SMP in low level income countries?

1.2 Is there any effect of governance indicators on SMP in high level income countries?

1.3Is there any effect of governance indicators on SMP in middle level income countries?

2. Is there any moderating effect of market competition on the relationship between governance indicators and SMP?

2.1 Is there any moderating effect of market competition on the relationship between governance indicators and SMP in low level income countries?

2.2 Is there any moderating effect of market competition on the relationship between governance indicators and SMP in high level income countries?

2.3 Is there any moderating effect of market competition on the relationship between governance indicators and SMP in middle level income countries?

1.2 Research Objectives

1. To assess the effect of governance indicators on SMP.

1.1 To evaluate the impact of governance indicators on SMP in low level income countries.

1.2 To evaluate the impact of governance indicators on SMP in high level income countries.

1.3 To evaluate the impact of governance indicators on SMP in middle level income countries.

2. To evaluate the moderating effect of market competition on the relationship between governance indicators and SMP.

2.1 To evaluate the moderating effect of market competition on relationship between governance indicators and SMP in low level income countries.

2.2 To evaluate the moderating effect of market competition on the relationship between governance indicators and SMP in high level income countries.

2.3 To evaluate the moderating effect of market competition on the relationship between governance indicators and SMP in middle level income countries.

1.3 Significance of the Study

SMP is very essential for overall economic growth and prosperity of a country. Prior studies have test many factors influencing SMP. However, still some of the factors identified through literature are under explored. According to author’s best knowledge, no previous study has explored the moderating effect of market competition on the relationship between governance indicators and SMP. Accordingly, this study will provide a parsimonious model to enhance SMP. Furthermore, the analysis subpanel (on the basis of income level) can provide more robust estimations to the concerned readers.

Chapter 2


Literature Review and Hypothesis development:

This section of the study explains the academic research conducted on moderating effect of market competition on the relationship between governance indicators and SMP. This study considered hypothetical and experimental theories related with topic. Theoretical literature review provides assistance to undergo already existing theories and the degree of relationship of stock market with governance indicators. The empirical literature review addresses the indicators those have much effect on SMP. This chapter begins with underpinning theories, determinant of stock market, relationship between the variables and summary of the literature review.

2.1 Underpinning Theory

Different researchers have uses the different theories in support of their argument regarding to the SMP. This study used endogenous growth theory, efficient market and behavioral finance theory, Good Governance theory and Pure-contestability (competition theory) to find the relation between the independent and dependent variables.

2.1.1 Endogenous Growth Theory

According to Endogenous growth theory economic growth is achieved by internal factors and not by external (Agarwal, 2001). Investment in human capital, invention and information are the main contributors to economic growth. This theory suggests that policy measures play very important role in long run growth of economy and this long run growth can be find by yield per person growth rate, depends on the development rate of total factor output.

2.1.2 Efficient Market and Behavioral Biases

Eugene Fama developed this theory who reveals that stock is always traded on fair value. According to this theory asset prices are completely reflect all available information. This theory basically contains three hypotheses strong semi-strong and weak. The weak form presents all available past publically information about stock prices. Semi-strong form reveals both publically available information and new public information. The strong form reveals also reflects the hidden information. Kenneth French, (2012) supported this view as he suggested that abnormal returns distribution of US mutual funds is very similar that are expected.

Behavioral biases play a crucial role in investment judgment creation. This concept opposed the perfect rationality and acknowledged emotional factors and their influence on decision-making as other traditional theories of finance suggested. However, influence of emotions is ignored in investment decision making (Aronson, Cohen, Nystrom, Rilling & Sanfey, 2003). Behaviors of investors are different because of different situation, incorrect decisions and falsification in observation where as other traditional models consider human as perfect balanced negotiator (Adetiloy & Babajide, 2012). Behavior finance creates serious doubt on the legitimacy of traditional finance theory like efficient market theory. Franco Modigliani and Merton Miller work in finance, they assumed normal man as who maximize utility is not appropriate due to absence of experimental evidence (De Bondt, Mayoral & Vallelado, 2013).

2.1.3 Good Governance Theory

Basic principles are set by good governance theory to run the every form of government (Minogue, Polidano and Hulme, 1998). IMF (2012) declares that good governance include rule of law, effectiveness and responsibility of the civic sector, and corruption. Moreover, UNDP (2007) define these eight principles named as governmental impact, rule of law, transparency, openness, unanimity, justice and completeness, efficiency and effectiveness, and accountability.

2.1.4 Pure-contestability (competition theory)

Perfect competition is well established theory in which price taking procedures of product is based on average price when information on prices are perfect Varian, (1984). This theory has main three aspects are known as

  1. No entry or exit barriers
  2. No sunk costs
  3. Access to the same level of technology

Some economist suggests that price can not only be determined by market structure but competition is also an important factor to determine the price and output Brock (1983). For example in monopoly firms are enjoying abnormal profits because they have no fear of competition. Keeping in view this situation others firms can easily enter in market and this will lead towards higher competition and lower down the prices. Thus, this situation will make the market more contestable. Sunk cost cannot be recovered after firm’s shut down. For example when new firms enter in the market they need to buy new machinery and if somehow these firms unable to compete with already existing firms in that market they will try to exit from the market. In this situation if they become unable to shift the machinery and decided to sale out that machinery ultimately they will not be able to sell it on the purchase price so this difference will be considered as sunk cost. It will be considered uncontestable markets and no firms will enter in this market.

Firms must have access to the same level of technology because this will help to find out the product average cost. Firms those are equipped with latest technology and having more information about production of goods can acheieve higher economies of scale because of lower average cost as compare to those firms who have less information and technology. Such kinds of firms will not be able to compete and thus they will exit from the market. So, it is necessary that government should provide equal access to technology and information (Sloman & Garratt, 2009).

2.2 Stock Market Performance

Stock market is an essential part of the economy as stock markets provide long term and short term investment opportunities to primary and secondary investors. So, when there is improvement in stock market then a visible improvement can be seen in the financial progress of a country (Barasa, 2014). The basic role of stock market is to serve as a place of exchanging the capital because only the stock market can perform this task well. Only stock markets enable the investors for making right investment in right place and in right time because stock market is a place which can provide the full and right information about the shares and securities to the investors (Fama, 1965a, b; Malkiel and Fama, 1970) and Behavioral Finance (Barberis and Thaler, 2003; Ritter, 2003; Shiller, 2003).

Stock market is an important place for the trade of shares and commodity. According to Arnold (2004), stock market is an important place where the investors can sell and buy the share and government and organization can raise their long term capital. Economic growth of a nation is directly connected with the stock market. Actually, stock markets provide assistance to boost the financial growth of the country by increasing the domestic savings and quality of investment. Stock markets play a vital role for domestic financial liberalization programs of most developed markets.

2.3 Governance Indicators

The academic and experimental literature shows an important affiliation between governance indicators and SMP. The quality of governance has an important effect on the performance of the stock market for any economy. According to Manzoor, (2013) political stability (PS) provides positive environment to the business activities because investors feel low risk in the financial market of the country. Moreover, this study reveals that governance indicators has direct link to the fluctuation in the stock price. Beaulieu and Caron, (2005) reveal that return on stock has positive relation with governance quality. Moreover Fan, Fui and Zhao, (2008) reveal that the countries having poor governance quality have higher agency and transaction cost as compared to those countries having good governance structure.

According Brooks, (2016) governance quality has positive impact on stock market growth. The effect of governance on SMP was examined by Hooper et al. (2009). The result indicate that stock market improvement in decent ruled economies have inferior level of hazard and higher equity return. Governance is an important element for the stock market development because good governance provides the facility to enhance the external financing Chiou et al., (2010). Li and Filer (2007), states that good governed countries attract more equity investors. Milyo (2012) reveals that stock markets respond instantly to governance indicators and proceedings. Bechtel (2009) stated that PS provide surety to investors for making the investment thus in this way it encourages growth, capital investment and improves overall economy’s performance. Chiu et al., (2005) revealed that political instability can change the behavior of foreign investors in the financial markets. Beaulieu et al. (2006), Aktas and Oncu (2006), Bailey et al. (2005) and Frey and Waldenstrom (2004) claimed that governmental proceedings strongly affect the return on stock and tradeoff capacity of the commercial markets. Low et al, (2011) study reveals adverse relation between the governance quality and SMP.

Munteanu and Brezeanu (2014) study reveals significant positive effect of governance quality on stock market across developing European economies. Lombardo and Pagano (2000) study confirmed the link between the governance quality and SMP by employing annoyed section of stock market indices from both developed and emerging markets. Lehkonen and Heimonen (2015) investigate the different countries data to investigate the response of stock market at the time of deviations in democracy and political risk and their study finds indication that provide positive strong relation between the governance quality and SMP. Empirical work by Bekaert and Harvey (2000) suggested that uncertainty, political instability and poor governance affect the volatility of stock market.

There are many examples through which we can easily understand the effect of uncertainty, political instability and poor governance on the stock market. The countries who are facing war and terror, their stock markets and economic growth is significantly low as compare to the stable countries Bailey et al. (2005). Ahmed and Javed (1999) study "The Impact of the Two Nuclear Tests" contained in Pakistan and India showed that Indian Nuclear Test had a harmful effect on the KSE average return rate, amount of trading, and amount of volatility decreased while Pakistan's nuclear tests had no significant impact on the average return rate. PS is considered an event which has although no direct relation with stock market but it is considered one of the most important factors that can affect the stock markets performance Bittlingmayer (1998), Henry (2000), Bekaert and Harvey (2000) and Bailey and Chung (1995). Bechtel (2009) argued that political stable countries maintain a sound economic growth.

Government capabilities can be measured through regulatory quality (RQ) index for making and executing the sound policies and regulations to boost the progress of private sector Kaufmann et al. (2009). Low et al, (2011) examines the relationship between the governance indicators and SMP and he discovers that RQ and stock market returns are positively related. There are two basic aspects in this regards known as regulation for political capture and regulation for public. Regulation for political capture is greater threat for the stock market because in this situation it becomes a tool of self-interest (Stiglitz, 1998). The outcome of RQ can be measured by effectiveness and efficiency. Social welfare goals are achieved by the effective and efficient regulation set by the government.

In developing countries regulations should be in such forms that they should provide assistance in maintaining the sustainable economic development and reduction in poverty (Guasch and Hahn, 1999). According to Parker, (1999) a well regulatory system is that it should keep the balance in accountability, transparency and consistency. According to him regulatory agencies should be answerable for the consequences of their action, the regulator must have the transparent decision and there must be consistency. All these three factors provide confidence to the public and investors that result a visible growth in the economic development. If there is inconsistency in the regulatory system then this inconsistency will lead towards the uncertainty and in this situation cost of capital will increase and this situation will damage the willingness to invest.

2.4 Market Competition

Competitive markets are more beneficial as compared to non-competitive markets because in the situation of competition firms continuously try to increase its sale and market share. So, in this scenario firms tried to focus on reducing its cost for the purpose of competing the others firms by keeping the prices low and maintaining quality of products.

According to some researchers market competition has inverse effect on the stock market because firms lose their market share. This loss leads the firms towards bankruptcy and in this situation people suffer a lot because they lose their jobs. Thus, in this way competition can create problems for the economy. In a market system there are main four types of competition known as monopolistic competition, perfect competition, oligopoly and monopoly and each of this competition may affect the stock market positively or negatively.

Many economists suggested that lack of market competition is the main reason behind the poor performance of the firms Allen and Gale (2000). Sharma (2010) examines the structure of competition in the product market with stock returns and he reveals the lower return on stock in this situation. He also finds that the companies with more succession production have higher return as compared to those firms who have lower succession production. Exchange is one of basic need of human and this need is fulfilled by the market. Hou and Robinson (2006) have studied the structure of competitive product prices with investment assets and they suggested that the structure of competitive product will affect the stock return. Hoberg and Phillips (2009) suggested that stock market valuation, investment and precede low stock returns in competitive industries. Competition always improves the stock liquidity through its disciplining effect on managers Balakrishnan and Cohen (2013) and Alimov (2013).

In market competition structure basically there are two basic forms known as intensity of local market and the intensity of the foreign market. Although, both of these factors affect the stock market a lot. In this study we are focusing on the association between the intensity of the local market and SMP. Competitive intensity means level of competition between the firms in a market (Grewal and Tansuhaj 2001; Jaworski and Kohli 1993).

It is a fact that the firms are competing for their survivals and this rule of competition drives firms to change the market situation (Greer 1992). Therefore, it is necessary to measure the concentration of competition for devising industrial competition guidelines and competition strategies. Porter, (1980) suggested five market forces through which intensity of competition can be measured and these are the hazard of substitute products, the hazard of conventional rivals, the hazard of new entrants, the bargaining power of suppliers, and the bargaining power of customers.

2.5 Moderating effect of market competition

Market competition is a crucial resource that leads towards the high market share or exit from the market for an organization (Waweru et al. 2004). Companies who are facing the intensity of market competition used a large number of product and service line (Mia and Clarke 1999; Al-Omiri and Drury 2007). Chong and Rundus (2004) suggested that the firms which are facing high competition are providing high quality product to their customers in order to satisfying them. Thus, in this way performance of such firms are improving and this situation effect the SMP positively.

Patiar and Mia (2009) suggested that customer satisfaction and quality are important factors to achieve the competitive advantage. Chong and Rundus (2004) reveal a positive effect of market competition and firm performance. Since governance indicators are necessary for enhancing the performance of the stock market which in turn affected by market competition, the need to explore the moderating effect of market competition is apparent. Large firms play a vital role in the economic development of a country due to their superior advantage in term of resources and capabilities (Murad et al., 2015).

Market competition actually is consisted upon some policies and these policies are directly related with the regulatory policies and public management. Both these play a crucial role to enhance the quality of regulatory and competition and thus in this way attract the investors. This situation in turn leads to a better financial development. On the other hand poorly designed rules affect the trades and humanity all together because these can lower down the investment, discourage competition, and make the trade difficult with the other markets (Growth Analysis, 2010). Competition is considered as a key factor for increasing the economic growth and consumer welfare (Gomaa, 2014; Buccirossi et al, 2011). According to endogenous growth theory competition constrains innovation because it provide the incentive to the firms to develop new product and services by allowing them abnormal profits which is gained by market power (Gaffard, 2006). Aghion et al (2000) suggested that maximum growth rate is always achieved by maximum degree of competition.

Giroud and Mueller (2011) argued that managers should be provided incentives through good governance so in case of less competition firms may perform well. Nickell et al. (1997) suggested that market competition and governance indicators are the determinants of productivity growth in manufacturing firms. Government behavior has a direct effect on the competition because strategies about the markets are formed by these actors and they are not cleared about the consequences of their policies until policies are not long term. Long term policies are formed only in those countries where there is a complete PS. So, this phenomenon shows that PS is necessary to improve the performance of the stock market.

Government effectiveness (GE) is directly linked with the intensity of market competition because policies about competition are formed by the government. If the government is less effective than its means policies will not be implemented properly. In result, this situation will stop the economic growth of the countries (Broadman, 2007). Furthermore, he suggests that even in case of poor performance of governance product market competition may provide incentives to the executives in achieving objectives by the means of well-organized production and thus in this way this study highlighted the moderating effect of market competition on the relationship between governance indicators and SMP.

Competition is the key factor for the operation of the market because it increases the productivity and growth which in turn increase the wealth and minimize the poverty (Cook et al., 2007). They also suggest that wealth creation is a big relief for the people because it increases the purchasing power of the people. Broadman (2007) proved that market competition bound the governments to make the regulatory reforms. Furthermore, according to critics of United States, government reforms some time can cause serious chaos such as high cost, unfairness, complexity and delay. This situation leads towards the business failure, increase the poverty, decrease the domestic economic growth and decrease the employment level.

On the other hand, market competition in this particular situation plays a very important role because market competition bound the manager to control the cost in order to keep the firm in the market which in turn minimize the sale price and increase the sale volume of the firms. This situation on one side suit the end user because goods and services are available at the cheaper rate and on other side it increase the market share of the firm. Dollar and Kraay (2001) suggested that market competition has positive strong effect on government policies because market competition increase opportunity for innovation and growth, decrease the chances of corruption and minimize the difficulties of end users. They also suggested that market competition increase the effectiveness of expenditure provided on services such as infrastructure and education. Thus, government policies are not automatic, market competition enforce the government to make such kinds of policies that are helpful for the investment environment which in result increase the confidence of investors to make the investment.

Entry and exit barriers become low in case of market competition because goods and services are available at fair prices to the consumers and firms are able to sell their product on fair terms. Report of the Commission for Africa (2005) concluded and observed that:

“Robust competition laws and policies with strong institutions to enforce them are vital to improving productivity and to promoting innovation and better prices”

Market competition itself enforce the government to make the market competition polices efficient and effective. For example when the process of developing a competition law in Egypt was under way, opposition to the proposal was planned by a prominent MP who held a leading steel mill. Market competition urges the government to make the suitable environment for the firms in shape of infrastructure, legal frame work and effectiveness of the financial system Lewis (2004). Market competition matters a lot for the both economic growth and to decrease the poverty, so there is need to think about it at policy level in government, in the business sector and by consumers in order to boost the economic growth. This study argues that only good laws are not enough, there is still need that government must show support and must recognize the rules and laws on competition to enhance the prosperity, for creating job opportunities, and most important for development of country.

2.6 Summary of Literature Review

Although, many studies discuss the relationship between the governance indicators and SMP yet no author has tested the effect of market competition on the relationship between the governance indicators and SMP. In this study we focus on the moderating effect of market competition on the relationship between the governance indicators and SMP we find literature support in form on hypothesis that the countries having the poor governance but having the highly competitive markets are still able to maintain the SMP.



Methodology:

The methodology of this study is design to assess the moderating effect of market competition on the relationship between the governance indicators and SMP from all over the world. In this study we used dynamic econometric model to account for endogeneity issue. We have adopted this model on the basis of the following advantages. Firstly, it can be applied both individual regressors 1(0) and 1(1) irrespective of stationarity. Secondly, this model takes large number of lags to examine the data process from general to specific (Laurenceson and Chai, 2003). Thirdly, this model provides the most reliable estimates of long-run coefficient (Gerrard & Godfrey, 1998; Laurenceson & Chai, 1998).

Stock Market Performance

Stock market is a place where shares are traded of public listed companies for the purpose of raising their capital. It also facilitates the stock broker to trade the company stocks and other securities. It is necessary for the trade of stock that it must be listed on exchange.

SMP is measured through financial market development. Financial market development increases the economic growth and thus, reduces the poverty by decreasing the cost occurred in the financial investment. (Data is collected from the World Bank)

Governance indicators

Governance Indicators capture six key dimensions of governance (Voice & Accountability, Political Stability and Lack of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption) between 1996 and present.

Governance quality is measured through political stability, regulatory quality and government effectiveness. These variables are developed by Kaufmann et al. (2010). (Data is collected from the World Bank).

Market competition

Competition is the rivalry between companies selling similar products and services with the object of making income, revenue, and market share growth. Companies are motivated by the market competition to enhance their sale volume by implementing four components of the marketing mix known as product, place, promotion, and price.

To measure the moderating effect of market competition on the relationship between the governance indicators and SMP we will use the intensity of local market and for product market competition will be measured by industry concentration analysis as employed by Hou & Robinson (2006).

Concentration is a helpful way to measure the intensity (Ye et al. 2009), which is a useful instrument that quantifies the degree to which market shares are circulated among incumbents (Bajo and Salas, 2002). Concentration can be measured by two ways, relative and absolute, that measure the degree to which a market proceeds from a predefined competition position (Fedderke and Szalontai 2009). (Data source World Economic Forum Global Competitive Index).

Gross domestic product Per Capita

Gross domestic product is the total value of everything produced in the country. It doesn't matter if it's made by area residents or foreigners. If they are located within the country's boundaries, their production is included in GDP.

To avoid double-counting, GDP includes the final value of the product, but not the parts that go into it. For example, a U.S. footwear manufacturer uses laces and other materials made in the United States. Only the value of the shoe gets counted; the shoelace does not.

GDP can be calculated by the total value of final goods and services produced within a given country.

Market size

The market size for a business line is the total potential number of customers or sales, usually in a given year. For an existing type of business, we can look at existing sales numbers to understand the market size. If you're rolling out a new brand of shampoo or car, it's unlikely that you'll cause people to buy significantly more bottles of shampoo or new cars, so the market size is essentially the existing sales numbers in the industry. Market potential is often used as another term for the same concept. Often rough sales numbers in an industry can be found online or through industry publications.

Market size is measured by multiplying the number of target customers by penetration rate.

Sampling

Data for this study has been taken from global sample by dividing into subpanel of Low level income countries, middle level income countries and high level income countries for the period spanning over from 2007 to 2016.

Statistical Test

This study will use static model such as OLS, Fixed effect estimation, random effect estimation and Prais-Winsten regression estimation to evaluate and analyze the data.


Operational Model

SMP = β0 + β1PS + β2RQ + β3GE + β4 MC + β5 PSMC + β6 RQMC + β7 GEMC + β8 GDP + β9 MS + ε

Where as

SMP = Stock Market Performance

PS = Political Stability

RQ = Regulatory Quality

GE = Government Effectiveness

MC = Market Competition

PSMC = Interaction of Political Stability with MC

RQMC = Interaction of RQ with MC

GEMC = Interaction of GE with MC

GDP = Gross domestic Product

MS = Market Size













Analysis and Results:

Descriptive Test

Descriptive statistics has been explained in table 4.1 which includes Mean, Standard Deviation, Minima and Maxima values of dependent, independent, moderator and control variables. Data is spanning over the period of 10 years from 2007 to 2016. Data of 110 countries have been taken. Total number of observations is 1110. Data is divided into subpanel as High Income Level, Middle Income Level and Low Income Level. Out of 110 countries 47 countries are high income level countries, 54 are middle income countries and 9 countries have low income level.

According to the results value of R-Square is 89% at global level, 90% at high income level, 88% at middle income level and 88% at low income level. These values of R-Square show strong relationship between the variables used in the data.

This table results reveals that government effectiveness has positive and significant effect on SMP at global level and middle income level because the value of P in both said cases is less than 0.03 and 0.00 with a beta value of 0.00 and 0.01 respectively. So this situation indicates that the countries having the effective government system have good impact on the SMP. It has positive but insignificant effect on SMP in case of high income level and low income level as P>0.1.

Furthermore, political stability has positive but insignificant effect on SMP at global level, high income level, middle income level and low income level as value of P>0.1.

Independent variable regulatory quality has positive and significant effect on SMP as P<0.1 in all cases. This table results show that regulatory quality is matter a lot because the sound rules of law strengthen the SMP. Therefore, this study reveals that regulatory quality is most important factor for financial market development.

This study finding suggests that governance indicators such as government effectiveness, political stability and regulatory quality have positive relationship with SMP. It implies that the countries having the effective institutional environment can enhance their SMP because when institutions are effective they can play a vital role in minimizing the risk and this situation build the confidence of investors. Resultantly, investors invest their funds in the stock market without any hesitation.

According to this table results of moderating variable market competition along with government effectiveness has positive but insignificant effect on SMP as P>0.1 at global and high income level but in middle income level it has significant effect on SMP. In case of low income level it has negative and insignificant effect on SMP. This result indicates that countries with highly effective governments and high level of market competition improve and enhance the economic development of countries. In low income level countries we find negative impact of market competition along with governance indicators because in those countries have neither effective governance system nor any competition among the organizations that is why the performance of the stock market is poor in such countries.

Moderating effect of market competition along with political stability has negative but significant effect on the performance of the stock market in case of global as well as middle income level because in both cases value of P<0.1. It has positive but insignificant effect in case of high income level and in case low income level it has negative and insignificant effect as P>0.1.

Market competition along with regulatory quality has positive but insignificant effect on SMP at global level as well as at high income level but it has negative and insignificant effect in case middle income level and low income level.

These findings reveal that the countries with high income level have sound governance indicators and therefore, the performance of markets is better as compare to middle income level and low income level because all variables have positive impact on SMP in case of high income level. Whereas, mixed results of all the variables is founded in case of middle income level and low income level.

Table 4.5 also describes the results about control variables GDP and Market size. According to table results GDP has positive and significant effect on SMP at global and high income level and it has positive but insignificant effect in case of middle income level and low income level.

Market size has negative but significant effect on SMP in high income level countries as value of P<0.1. It has also negative and insignificant effect on SMP at global level and middle income level but it has positive and insignificant effect in case low income level.

Findings and Discussion:

This study results reveal that the countries having the sound and effective governance indicators, they have much better and developed stock markets. This impact of governance indicators even become more stronger when market competition in considered in analysis because there is significant decrease is founded in p value in case of global, high income level and middle income level. Gross domestic product has also strong positive impact on SMP. Market size has negative impact on stock market performance.

Implications:

This study has not only explore the moderating effect of market competition on the relationship between the stock market performance and governance indicators but this study also provide some guidelines to the policy makers, investors and researchers. This study also highlights the importance of stock market performance that how much stock market performance is important for the economic development of any country.

Conclusion and Limitations:

This study provides us the result of moderating effect of market competition in connection between the SMP and governance indicators. From data analysis we find that government effectiveness and regulatory quality affect the SMP positively and have significant effect on it but political stability has positive but insignificant effect on SMP at global level. We also find that political stability and government effectiveness has positive but insignificant effect on SMP.

While regulatory quality has positive and significant effect on SMP at high income level. In case of middle income level government effectiveness and regulatory quality has positive and significant effect while political stability has positive but insignificant effect on SMP. Government effectiveness and regulatory quality along with market competition has positive but insignificant effect on SMP where as political stability along with market competition has negative but significant effect on SMP at global level. In case of high income level all independent variables along with market competition has positive but insignificant effect on SMP and low income level all independent variables have negative and insignificant effect.

Government effectiveness along with market competition has positive and significant effect while political stability along with market competition has negative but significant effect and regulatory quality has negative but significant effect on SMP in case of middle income level. Table 5 result also shows the result of control variables GDP that has positive and significant effect on SMP in case of global and high income level where as it has positive but insignificant effect in case middle income and low income level. Market size has negative and insignificant effect on SMP at global as well as at middle income level. In case high income level market size has negative but significant effect on SMP and in case of low income level it has positive but insignificant on SMP.

Through this study we tried to explore the logical analysis of determinant of SMP that how much government effectiveness, political stability and regulatory quality affect the SMP at global, high income, middle income and low income level. We also analyze the effect of these variables along with market competition as a moderating variable. Meanwhile GDP and market size as control variables are also tested in this study to examine the SMP.

On the other hand every study has some limitation. This study limitation is as under which must be consider finding out the best result.

  1. In this study we have only considered the 110 countries data out of 195 because of unavailability of data of others remaining countries.
  2. This study has only tested the three governance indicators (government effectiveness, political stability and regulatory quality) along with market competition as moderating variable and GDP and market size as control variables to judge the performance of the stock market. While other governance indicators and some other variables like interest rate, inflation, exchange rates, trade openness, private Capital Flows and stock market integration have also significant effect on SMP.

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