Investigating the Nexus between Stock Market and Institutional Quality in Emerging Markets and Developing Countries: A Panel Data Analysis

Abstract

Purpose: This study empirically explores the impact of institutional quality on the stock market in Emerging Markets and Developing Countries (EM&DC), study utilizes individual institutional quality indicators as well as aggregated in the form of an institutional quality index and checks their impact on the stock market. Methodology: The study employs a sample of 43 Emerging Markets and Developing Countries for the time duration from 1996 to 2022. By applying the Generalized method of moments (GMM) and Principal Component Analysis (PCA). Findings: The result shows that Institutional quality is not good in these countries and plays a detrimental role in association with the stock market. Mostly individual indicators of institutional quality have a negative and significant impact on the stock market except voice and accountability have a positive and significant impact on the stock market. We also construct an Institutional quality index by applying Principal component analysis (PCA), which also has a negative impact on the stock market. Implications: The findings underscore the importance of institutional factors in shaping the financial development of nations. Through our analysis, it becomes evident that emerging markets and developing countries (EM&DCs) should prioritize enhancing their institutional frameworks, as these play a pivotal role in influencing financial development.