Does Governance Quality Impact Stock Market Development? An Insight of BRICS Economies

Abstract

BRICS nations are playing a critical role in the global economic setting, but to maintain sustained economic growth they are required to make relentless efforts towards certain challenges. These challenges pertain to diverse governance areas including political, socio-economic, and legal conditions. This paper unfolds the impact of the level of governance quality indicators on stock market development for BRICS nations during the period from 2007 to 2021. Using panel data regression, our empirical findings confirm that governance indicators are critical for the development of the stock market. Our results show that governance indicators such as Government Effectiveness, Rule of Law, and Voice and Accountability are significant variables affecting the stock market development. We find that giving citizens more autonomy to participate in the formulation and execution of policies, improves the development of stock markets. Similarly, lesser political influence will also lead to better growth of the stock market. Additionally, the study evidence that a stronger legal environment in BRICS nations promotes lesser corrupt practices such as insider trading, but at the same time hinders the growth of the stock market. Policymakers in BRICS nations should follow a consistent policy to improve their governance indicators which are now becoming essential for stock market development.