Effect of Portfolio Equity Investment Flows on Equity Returns and Economic Growth in 11 Major African Stock Markets

Abstract

Many African countries are trying to attract private capital flows in a context where the sixfold increase in capital inflows since 2000 for most African countries is the work of private sector. Thus, debt-creating (bank and other private capital) declined in favor of rising portfolio equity and FDI. In this paper, we try to evaluate the effect of net portfolio equity investment flows on equity returns and in turn on economic growth. To do this, we analyze first the effect using standard models. In a second step, we develop a system of simultaneous equations to study a joint significance of net equity flows on equity returns and economic growth, but also the simultaneous evolution of equity returns and economic growth. The estimates on a panel of eleven African countries hosting major stock markets over the period 1990-2013, by Least Squares (LS) method (standard models), Two Stage Least Squares (2SLS), Three Stage Least Squares (3SLS) methods (simultaneous equations) and Least-Squares Dummy Variable (LSDV) method (dynamic models), give the following main results: the stock market size is a positive determinant of equity returns (size bias); there is a simultaneous evolution of equity returns and economic growth; net portfolio equity investment flows have a positive, but not statistically significant effect on equity returns and economic growth. Therefore, the promotion of critical stock market size is a policy to recommend to African countries.