The stock market capitalisation and financial growth nexus : an empirical study of western European countries

This study aimed to analyse the stock market capitalisation and financial growth nexus of Western European countries from 1989 to 2018 in order to understand the interactive relationship between the stock market and the economy to identify the specifc financial market channels through which economic growth is managed. The pooled least square findings identifed positive signifcant relationships between stock market capitalisation, foreign direct investment and stocks traded and financial growth, while negative and signifcant relationships were found between GDP per capita growth and infation and financial growth. The fixed effect, random efect and pooled mean group models yielded the same results, indicating positive signifcant relationships between stock market capitalisation and stocks traded and financial growth, while the effect of foreign direct investment on financial growth was positive and insignifcant. Finally, there were negative and signifcant relationships between GDP per capita growth and infation and financial growth. The results from the quantile regression (tau=0.10, 0.20, 0.30, 0.40 and 0.50) there were positive relationships between stock market capitalisation and stocks traded and financial growth for all percentiles, while there were negative relationships between GDP per capita growth and infation and financial growth except at the 0.30 percentile; foreign direct investment also had a negative relationship to financial growth at the 0.30 percentile. Most variables were signifcant at a 1% signifcance level. However, infation was insignifcant at the 0.10 percentile, foreign direct investment was insignifcant at the 0.20, 0.30, 0.40 and 0.50 percentiles, and stocks traded were insignifcant at the 0.40 and 0.50 percentiles. All of the applied the diagnostic tests confrmed the robustness of the data. The main conclusion is that countries should minimise any regulatory obstacles to fnancial markets and protect the rights of shareholders. Furthermore, advanced fnancial systems should reduce the obstacles faced by companies in terms of external fnancing.