Democracy and stock market development: The African experience

This study takes a broad approach to the relationship between political risk resolution through democracy and stock market development. Specifically, it examines the empirical relationship between the degree of democracy (ranging from non-democracies or autocracies to wellestablished "mature" democracies) and stock market size and liquidity. Using the random effects Generalized Least Squares methodology on a sample of 22 African countries and spanning the period 1985-2011, this study finds (i) the greater the degree of democracy, the greater the liquidity of the stock market but the impact on the size of the market is insignificant; (ii) the relationship between military leadership and stock market development is statistically insignificant; (iii) having constitutional limits on the number of years a chief executive is allowed to serve promotes stock market development; and (iv) a higher degree of political competitiveness has a significantly positive impact on both stock market size and liquidity.