Economic Change and Restructuring

, Volume 52, Issue 4, pp 439–451 | Cite as

Effectiveness of legal institutions in stock market development in sub-Saharan Africa

  • Olufemi Adewale AlukoEmail author
  • Bolanle Aminah Azeez


The law and finance theory posits that legal institutions are associated with stock market development. We examine the effectiveness of legal institutions in stock market development in 11 countries in sub-Saharan Africa for the period 2000–2014. Based on the two-stage least squares estimator, we find that the effectiveness of legal institutions does not promote stock market development in sub-Saharan Africa, after controlling for income, banking sector development, inflation, endowments, capital account liberalization, culture, and democracy. We provide empirical support for the law and finance theory by establishing that legal institutions explain cross-country differences in stock market development in sub-Saharan Africa.


Legal institutions Stock market development Sub-Saharan Africa 

JEL Classification

G20 K15 O55 



We would like to express gratitude to the editor and anonymous referees for their comments and suggestions which were useful in improving the quality of our paper. We bear responsibility for all remaining errors.


  1. Acemoglu D, Johnson S (2005) Unbundling institutions. J Polit Econ 113(5):949–995Google Scholar
  2. Acemoglu D, Johnson S, Robinson JA (2001) The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91(5):1369–1401Google Scholar
  3. Andrianaivo M, Yartey CA (2010) Understanding the growth of African financial markets. Afr Dev Rev 22(3):394–418Google Scholar
  4. Armour J, Deakin S, Sarkar P, Siems M, Singh A (2009) Shareholder protection and stock market development: an empirical test of the legal origins hypothesis. J Empir Leg Stud 6(2):343–380Google Scholar
  5. Asongu SA (2012) Government quality determinants of stock market performance in African countries. J Afr Bus 13(3):183–199Google Scholar
  6. Baltagi BH, Demetriades PO, Law SH (2009) Financial development and openness: evidence from panel data. J Dev Econ 89(2):285–296Google Scholar
  7. Baum CF, Schaffer ME, Stillman S (2007) Enhanced routines for instrumental vaiables/generalized method of moments estimation and testing. Stata J 7(4):465–506Google Scholar
  8. Beck T, Levine R (2004) Stock markets, banks, and growth: panel evidence. J Bank Finance 28(3):423–442Google Scholar
  9. Beck T, Levine R (2005) Legal institutions and financial development. In: Menard C, Shirley MM (eds) Handbook of new institutional economics. Springer, BostonGoogle Scholar
  10. Beck T, Demirgüç-Kunt A, Levine R (2001) Law, politics and finance. World Bank Working Paper No. 2585Google Scholar
  11. Beck T, Demirgüç-Kunt A, Levine R (2003a) Law, endowments and finance. J Financ Econ 70(2):137–181Google Scholar
  12. Beck T, Demirgüç_Kunt A, Levine R (2003b) Law and finance: Why does legal origin matter? J Comp Econ 31(4):653–675Google Scholar
  13. Beck T, Demirgüç-Kunt A, Levine R (2005) Law and firms’ access to finance. Am Law Econ Rev 7(1):211–252Google Scholar
  14. Beck T, Demirgüç-Kunt A, Maksimovic V (2006) The influence of financial and legal institutions on firm size. J Bank Finance 30(11):2995–3015Google Scholar
  15. Ben Naceur S, Ghazouani S, Omran M (2007) The determinants of stock market development in the Middle-Eastern and North African region. Managerial Finance 33(7):477–489Google Scholar
  16. Ben Naceur S, Cherif M, Kandil M (2014) What drives the development of the MENA financial sector? Borsa Istanbul Rev 14(4):212–223Google Scholar
  17. Billmeier A, Massa I (2009) What drives stock market development in emerging markets—institutions, remittances, or natural resources? Emerg Mark Rev 10(1):23–35Google Scholar
  18. Boubakri N, Hamza O (2007) The dynamics of privatization, the legal environment and stock market development. Int Rev Financ Anal 16(4):304–331Google Scholar
  19. Boyd JH, Levine R, Smith BD (2001) The impact of inflation on financial sector development. J Monet Econ 47(2):221–248Google Scholar
  20. Cherif M, Gazdar K (2010) Macroeconomic and institutional determinants of stock market development in MENA region: new results from a panel data analysis. Int J Bank Finance 7(1):139–159Google Scholar
  21. Chinn M, Ito H (2006) What matters for financial development? Capital controls, institutions, and interactions. J Dev Econ 81(1):163–193Google Scholar
  22. Demirgüç-Kunt A, Levine R (1996) Stock market development and financial intermediaries: stylized fact. World Bank Econ Rev 10(2):291–321Google Scholar
  23. Demirgüç-Kunt A, Maksimovic V (1998) Law, finance, and firm growth. J Finance 53(6):2107–2137Google Scholar
  24. Djankov S, La Porta R, Lopez-de-Silanes F, Shleifer A (2003) Courts. Q J Econ 118(2):453–517Google Scholar
  25. Dutta N, Mukherjee D (2011) Is culture a determinant of financial development. Appl Econ Lett 19(6):585–590Google Scholar
  26. Easterly W, Levine R (1997) Africa’s growth tragedy: policies and ethnic divisions. Q J Econ 112(4):1203–1250Google Scholar
  27. Fowowe B (2014) Law and finance revisited: evidence from African countries. S Afr J Econ 82(2):193–208Google Scholar
  28. Gaffeo E, Garalova P (2014) On the finance-growth nexus: additional evidence from Central and Eastern Europe countries. Econ Change Restruct 47(2):89–115Google Scholar
  29. Girma S, Shortland A (2008) The political economy of financial development. Oxf Econ Pap 60(4):567–596Google Scholar
  30. Hail L, Leuz C (2006) International differences in the cost of equity capital: Do legal institutions and securities regulation matter? J Account Res 44(3):485–531Google Scholar
  31. Johnson S, Boone P, Breach A, Friedman E (2000) Corporate governance in the Asian financial crisis. J Financ Econ 58(1):141–186Google Scholar
  32. Kaufmann D, Kraay A, Mastruzzi M (2010) The worldwide governance indicators: a summary of methodology, data and analytical issues. World Bank Policy Research Working Paper No. 5430Google Scholar
  33. Krishnamurti C, Sěvić A, Šević Z (2005) Legal environment, firm-level corporate governance and expropriation of minority shareholders. Econ Change Restruct 38(1):85–111Google Scholar
  34. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1997) Legal determinants of external finance. J Finance 52(3):1147–1170Google Scholar
  35. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1998) Law and finance. J Polit Econ 106(6):1113–1155Google Scholar
  36. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1999) The quality of government. J Law Econ Organ 15(1):222–279Google Scholar
  37. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (2000) Investor protection and corporate governance. J Financ Econ 58(1):3–27Google Scholar
  38. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (2002) Investor protection and corporate valuation. J Finance 57(3):113–127Google Scholar
  39. La Porta R, Lopez-de-Silanes F, Shleifer A (2006) What works in securities law? J Finance 61(1):1–32Google Scholar
  40. Law SH, Azman-Saini WNM (2012) Institutional quality, governance, and financial development. Econ Gov 13(3):217–236Google Scholar
  41. Law SH, Habibullah MS (2009) The determinants of financial development: institutions, openness and financial liberalisation. S Afr J Econ 77(1):45–58Google Scholar
  42. Levine R (1999) Law, finance, and economic growth. J Financ Intermed 8(1):8–35Google Scholar
  43. Levine R (2005) Law, endowments and property rights. J Econ Perspect 19(1):61–88Google Scholar
  44. Levine R, Zervos S (1996) Stock market development and long-run growth. World Bank Econ Rev 10(2):323–339Google Scholar
  45. Levine R, Zervos S (1998a) Stock markets, banks, and economic growth. Am Econ Rev 88(3):537–558Google Scholar
  46. Levine R, Zervos S (1998b) Capital account liberalization and stock market development. World Dev 26(7):1169–1183Google Scholar
  47. Morck R, Yeung B, Yu W (2000) The information content of stock markets: Why do emerging markets have synchronous stock price movements? J Financ Econ 58(1):215–260Google Scholar
  48. Ng A, Dewandaru G, Ibrahim MH (2015) Property rights and the stock market-growth nexus. N Am J Econ Finance 32:48–63Google Scholar
  49. Pistor K (2013) A legal theory of finance. J Comp Econ 41(3):315–330Google Scholar
  50. Pistor K, Raiser M, Gelfer S (2000) Law and finance in transition economies. Econ Transit 8(2):325–368Google Scholar
  51. Posner DN (2004) Measuring ethnic fractionalization in Africa. Am J Polit Sci 48(4):849–863Google Scholar
  52. Staiger D, Stock JH (1997) Instrumental variables regression with weak instruments. Econometrica 65(3):557–586Google Scholar
  53. Stock JH, Yogo M (2005) Testing for weak instruments in linear IV regression. In: Andrews DWK, Stock JH (eds) Identification and inference for econometric model: essays in honour of Thomas Rothenberg. Cambridge University Press, CambridgeGoogle Scholar
  54. Stulz RM, Williamson R (2003) Culture, openness, and finance. J Financ Econ 70(2):313–349Google Scholar
  55. Yartey CA (2008) The determinants of stock market development in emerging economies: Is South Africa different? International Monetary Fund Working Paper No. 08/32Google Scholar
  56. Yartey CA (2010) The institutional and macroeconomic determinants of stock market development in emerging economies. Appl Financ Econ 20(21):1615–1625Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of FinanceUniversity of IlorinIlorinNigeria
  2. 2.Department of FinanceEkiti State UniversityAdo-EkitiNigeria

Personalised recommendations