Exploring the Nexus Between Pension Funds and Stock Market Development - Does Country-level Governance Matter? Evidence from Global Economies
Abstract
We examine whether country-level governance quality moderate the effect of pension funds on stock market development. Our sample consists of 16 countries, including developed and emerging countries, analysed during the period 1996-2016 using Common Correlated Mean Group and Augmented Mean Group techniques. The main findings show that, while the moderating effect of country-level governance is insignificant for the overall sample of countries, the effect is significant for some individual countries in the panel. This suggests in some economies, governance quality moderates the financial system mechanisms which influence the institutional investors’ decision to allocate the funds needed to develop the stock markets.
References
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Ajide, K. B. (2014). Quality of Governance and Stock Market Performance: The Nigerian Experience. Journal of Economics and Development Studies, 2(2), 501–522.
Al-Marhubi, F. (2004). The determinants of governance : A cross-country analysis. Contemporary Economic Policy, 22(3), 394–406.
Alda, M. (2017). The relationship between pension funds and the stock market: Does the aging population of Europe affect it? International Review of Financial Analysis, 49, 83–97.
Aleksynska, M., & Havrylchyk, O. (2013). FDI from the south: The role of institutional distance and natural resources. European Journal of Political Economy, 29, 38–53.
Aras, G., & Müslümov, A. (2005). Institutional Investors and Stock Market Development : A Causality Study. ISE Review, 29, 1–12.
Asongu, S. A. (2012). Government Quality Determinants of Stock Market Performance in African Countries. Journal of African Business, 13(3), 183–199.
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Ben Naceur, S., Cherif, M., & Kandil, M. (2014). What drives the development of the MENA financial sector? Borsa Istanbul Review, 14(4), 212–223.
Bjørnskov, C. (2006). The multiple facets of social capital. European Journal of Political Economy, 22(1), 22–40.
Boţa-Avram, C. (2013). Empirical Analysis of Effects of Country-level Governance to Strength of Investor Protection. Procedia - Social and Behavioral Sciences 99(2012), 1063–1072.
Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. The Review of Economic Studies, 47(1), 239–252.
Butkiewicz, J. L., & Yanikkaya, H. (2006). Institutional quality and economic growth: Maintenance of the rule of law or democratic institutions, or both? Economic Modelling, 23(4), 648–661.
Capasso, S. (2006). Stock market development and economic growth. World Institute for Development Economics Research Paper No. 2006/102.
Catalan, M., Impavido, G., & Musalem, A. R. (2000). Contractual Savings or Stock Markets Development : Which Leads ? The World Bank Policy Research Working Paper 2421. https://doi.org/10.1596/1813-9450-2421
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Cherif, M., & Kaouther, G. (2010). Macroeconomic and Institutional Determinants of Stock Market Development in Mena Region. International Journal of Finance, 20(4), 4987–5005.
Compton, R. a., & Giedeman, D. C. (2011). Panel Evidence on Finance, Institutions and Economic growth. Applied Economics, 43(25), 3523–3547.
Dixit, A. (2009). Governance Institutions and Economic Activity. The American Economic Review, 99(1), 3–24.
Draženović, B. O., & Kusanović, T. (2016). Determinants of capital market in the new member EU countries. Economic Research-Ekonomska Istraživanja, 29(1), 1–12.
Eberhardt, M., & Teal, F. (2010). Productivity analysis in global manufacturing production. Oxford University WP 515.
Effiong, E. (2015). Financial Development, Institutions and Economic Growth: Evidence from Sub-Saharan Africa. MPRA WP 66085.
Effiong, E. L., & Asuquo, E. E. (2017). Migrants' Remittances , Governance and Heterogeneity. International Economic Journal, 31(4), 535–554.
Enache, C., Milos, L. R., & Milos, M. C. (2015). Pension reform and capital market development in Central and Eastern European countries. Economic Research-Ekonomska Istrazivanja, 28(1), 75–84.
Farooque, O. AL, & Yarram, S. R. (2013). Evidence on two-way relationships between foreign direct investment inflows and country-level individual governance indicators. The Singapore Economic Review, 58(2), 1-26
Filatotchev, I., Jackson, G., & Nakajima, C. (2013). Corporate governance and national institutions: A review and emerging research agenda. Asia Pacific Journal of Management, 30(4), 965–986.
Gankou, J. M., Bendoma, M., & Sow, M. N. (2016). The institutional environment and the link between capital flows and capital flight in cameroon. African Development Review, 28, 65–87.
Garcia, V., & Liu, L. (1999). Macroeconomic determinants of stock market development. Journal of Applied Economics, 2(1), 29–59.
Gazdar, K., & Cherif, M. (2015). Institutions and the finance-growth nexus: Empirical evidence from MENA countries. Borsa Istanbul Review, 15(3),137–160.
Genberg, H. (2015). Capital market development and emergence of institutional investors in the Asia-Pacific region. Asia Pacific Development Journal, 22(2), 1-26.
Hoyos, R. E. De, & Sarafidi, V. (2006). Testing for cross-sectional dependence in panel-data models. The Stata Journal, 6(4), 482–496.
Hryckiewicz, A. (2009). Pension reform, institutional investors’ growth and stock market development in the developing countries: Does it function? National Bank of Poland Working Paper 67.
Huang, H. C., Lin, S. C., Kim, D. H., & Yeh, C. C. (2010). Inflation and the finance-growth nexus." Economic Modelling, 27(1), 229–236.
Impavido, G., Musalem, A. R., & Tressel, T. (2003). The Impact of Contractual Savings Institutions on Securities Markets. The World Bank Policy Research Working Paper 2948.
John, Y., & Perron, P. (1991). Pitfalls and opportunities : what macroeconomists should know about unit roots, Chicago Journals, 6: 141–201.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The Worldwide governance indicators methodology and analytical issues. The World Bank Policy Research Working Paper 5430.
Krammer, S. (2013). Do good institutions enhance the effect of technological spillovers on productivity? Comparative evidence from developed and transition economies. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2402076
La Porta, R. R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. W., & Vishney, R. (1999). The quality of government. Journal of Law, Economics, and Organization, 15(1), 222–279.
Laeven, L. (2014). The Development of local capital markets : Rationale and challenges. IMF Working Paper 14/234.
Law, S. H., & Azman-Saini, W. N. W. (2008). The Quality of institutions and financial development. MPRA WP 12107.
Law, S. H., & Azman-Saini, W. N. W. (2012). Institutional quality, governance, and financial development. Economics of Governance, 13(3), 217–236.
Low, S.-W., Kew, S.-R., & Tee, L.-T. (2011). International evidence on the link between quality of governance and stock market performance. Global Economic Review, 40(3), 361–384.
Mackinnon, D. P. (2011). Social Work Practice. Research on Social Work Practice, 21(16), 675–681.
Manasseh, C. O., Mathew, T. E., & Ogbuabor, J. E. (2017). Investigating the nexus between institutional quality and stock market development in Nigeria: An autoregressive distributed Lag (ARDL) approach. African Development Review, 29(2), 272–292.
Matemilola, B. T., Bany-Ariffin, & Nassir, A. (2018). Interaction effects of country-Level covernance quality and debt on stock returns in developing Nations. Capital Markets Review, 26(1), 19–35.
Meng, C., & Pfau, W. D. (2010). The Role of Pension Fund in Capital Market Development. GRIPS Discussion Paper 10–17. Japan, National Graduate Institute for Policy Studies.
Naghavi, N., & Lau, W.-Y. (2014). Exploring the nexus between financial openness and informational efficiency – does the quality of institution matter? Applied Economics, 46(7), 674–685
Narayan, P. K., Sharma, S. S, & Thuraisamy, K. S. (2015). Can governance quality predict stock market returns ? New global evidence. Pacific-Basin Finance Journal, 1–14.
Nawaz, S. (2015). Growth effects of institutions : A disaggregated analysis. Economic Modelling, 45, 118–126.
Oseni, I. O., & Nwosa, P. I. (2011). Stock market volatility and macroeconomic variables in Nigeria: An exponential GARCH approach. European Journal of Business and Management, 2(10), 43-53.
Pesaran. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967–1012.
Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Paper in Economics 0435. Faculty of Economics, University of Cambridge.
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22, 265–312.
Pradhan, R. P., Arvin, M. B., Hall, J. H., & Bahmani, S. (2014). Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: The case of ASEAN countries. Review of Financial Economics, 23(4)., 155-173.
Roe, M. J., & Siegel, J. I. (2011). Political instability : effects on financial development , roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279–309.
Schmukler, S. L., & Raddatz, C. (2008). Pension funds and capital market development: How much bang for the buck? The World Bank Policy Research Working Paper 4757.
Siong Hook Law, & Habibullah, M. S. (2009). The Determinants of Financial Development : institutions , openness and financial. South African Journal of Economics, 77(1), 45–58.
Thomas, A., Spataro, L., & Mathew, N. (2014). Pension funds and stock market volatility: An empirical analysis of OECD countries. Journal of Financial Stability, 11(1), 92–103.
Tunyi, A. A., & Ntim, C. G. (2016). "Location advantages, governance quality, stock market development and firm characteristics as antecedents of African M&As Journal of International Management, 22(2), 147–167.
Ulusoy, V., & Demiralay, S. (2016). Energy demand and stock market development in OECD countries : A panel data analysis. Renewable and Sustainable Energy Reviews, 71(C), 141-149.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748.
Yartey, C. A. (2010). The institutional and macroeconomic determinants of stock market development in emerging economies. Applied Financial Economics, 20(21), 1615–1625.
Ajide, K. B. (2014). Quality of Governance and Stock Market Performance: The Nigerian Experience. Journal of Economics and Development Studies, 2(2), 501–522.
Al-Marhubi, F. (2004). The determinants of governance : A cross-country analysis. Contemporary Economic Policy, 22(3), 394–406.
Alda, M. (2017). The relationship between pension funds and the stock market: Does the aging population of Europe affect it? International Review of Financial Analysis, 49, 83–97.
Aleksynska, M., & Havrylchyk, O. (2013). FDI from the south: The role of institutional distance and natural resources. European Journal of Political Economy, 29, 38–53.
Aras, G., & Müslümov, A. (2005). Institutional Investors and Stock Market Development : A Causality Study. ISE Review, 29, 1–12.
Asongu, S. A. (2012). Government Quality Determinants of Stock Market Performance in African Countries. Journal of African Business, 13(3), 183–199.
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2009). Financial Institutions and Markets across Countries and over Time - Data and Analysis. The World Bank Policy Research Working Paper 4943. https://doi.org/10.1596/1813-9450-4943
Ben Naceur, S., Cherif, M., & Kandil, M. (2014). What drives the development of the MENA financial sector? Borsa Istanbul Review, 14(4), 212–223.
Bjørnskov, C. (2006). The multiple facets of social capital. European Journal of Political Economy, 22(1), 22–40.
Boţa-Avram, C. (2013). Empirical Analysis of Effects of Country-level Governance to Strength of Investor Protection. Procedia - Social and Behavioral Sciences 99(2012), 1063–1072.
Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. The Review of Economic Studies, 47(1), 239–252.
Butkiewicz, J. L., & Yanikkaya, H. (2006). Institutional quality and economic growth: Maintenance of the rule of law or democratic institutions, or both? Economic Modelling, 23(4), 648–661.
Capasso, S. (2006). Stock market development and economic growth. World Institute for Development Economics Research Paper No. 2006/102.
Catalan, M., Impavido, G., & Musalem, A. R. (2000). Contractual Savings or Stock Markets Development : Which Leads ? The World Bank Policy Research Working Paper 2421. https://doi.org/10.1596/1813-9450-2421
Cherif, M., & Dreger, C. (2016). Institutional Determinants of Financial Development in MENA countries. Review of Development Economics, 20(3), 670–680.
Cherif, M., & Kaouther, G. (2010). Macroeconomic and Institutional Determinants of Stock Market Development in Mena Region. International Journal of Finance, 20(4), 4987–5005.
Compton, R. a., & Giedeman, D. C. (2011). Panel Evidence on Finance, Institutions and Economic growth. Applied Economics, 43(25), 3523–3547.
Dixit, A. (2009). Governance Institutions and Economic Activity. The American Economic Review, 99(1), 3–24.
Draženović, B. O., & Kusanović, T. (2016). Determinants of capital market in the new member EU countries. Economic Research-Ekonomska Istraživanja, 29(1), 1–12.
Eberhardt, M., & Teal, F. (2010). Productivity analysis in global manufacturing production. Oxford University WP 515.
Effiong, E. (2015). Financial Development, Institutions and Economic Growth: Evidence from Sub-Saharan Africa. MPRA WP 66085.
Effiong, E. L., & Asuquo, E. E. (2017). Migrants' Remittances , Governance and Heterogeneity. International Economic Journal, 31(4), 535–554.
Enache, C., Milos, L. R., & Milos, M. C. (2015). Pension reform and capital market development in Central and Eastern European countries. Economic Research-Ekonomska Istrazivanja, 28(1), 75–84.
Farooque, O. AL, & Yarram, S. R. (2013). Evidence on two-way relationships between foreign direct investment inflows and country-level individual governance indicators. The Singapore Economic Review, 58(2), 1-26
Filatotchev, I., Jackson, G., & Nakajima, C. (2013). Corporate governance and national institutions: A review and emerging research agenda. Asia Pacific Journal of Management, 30(4), 965–986.
Gankou, J. M., Bendoma, M., & Sow, M. N. (2016). The institutional environment and the link between capital flows and capital flight in cameroon. African Development Review, 28, 65–87.
Garcia, V., & Liu, L. (1999). Macroeconomic determinants of stock market development. Journal of Applied Economics, 2(1), 29–59.
Gazdar, K., & Cherif, M. (2015). Institutions and the finance-growth nexus: Empirical evidence from MENA countries. Borsa Istanbul Review, 15(3),137–160.
Genberg, H. (2015). Capital market development and emergence of institutional investors in the Asia-Pacific region. Asia Pacific Development Journal, 22(2), 1-26.
Hoyos, R. E. De, & Sarafidi, V. (2006). Testing for cross-sectional dependence in panel-data models. The Stata Journal, 6(4), 482–496.
Hryckiewicz, A. (2009). Pension reform, institutional investors’ growth and stock market development in the developing countries: Does it function? National Bank of Poland Working Paper 67.
Huang, H. C., Lin, S. C., Kim, D. H., & Yeh, C. C. (2010). Inflation and the finance-growth nexus." Economic Modelling, 27(1), 229–236.
Impavido, G., Musalem, A. R., & Tressel, T. (2003). The Impact of Contractual Savings Institutions on Securities Markets. The World Bank Policy Research Working Paper 2948.
John, Y., & Perron, P. (1991). Pitfalls and opportunities : what macroeconomists should know about unit roots, Chicago Journals, 6: 141–201.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The Worldwide governance indicators methodology and analytical issues. The World Bank Policy Research Working Paper 5430.
Krammer, S. (2013). Do good institutions enhance the effect of technological spillovers on productivity? Comparative evidence from developed and transition economies. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2402076
La Porta, R. R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. W., & Vishney, R. (1999). The quality of government. Journal of Law, Economics, and Organization, 15(1), 222–279.
Laeven, L. (2014). The Development of local capital markets : Rationale and challenges. IMF Working Paper 14/234.
Law, S. H., & Azman-Saini, W. N. W. (2008). The Quality of institutions and financial development. MPRA WP 12107.
Law, S. H., & Azman-Saini, W. N. W. (2012). Institutional quality, governance, and financial development. Economics of Governance, 13(3), 217–236.
Low, S.-W., Kew, S.-R., & Tee, L.-T. (2011). International evidence on the link between quality of governance and stock market performance. Global Economic Review, 40(3), 361–384.
Mackinnon, D. P. (2011). Social Work Practice. Research on Social Work Practice, 21(16), 675–681.
Manasseh, C. O., Mathew, T. E., & Ogbuabor, J. E. (2017). Investigating the nexus between institutional quality and stock market development in Nigeria: An autoregressive distributed Lag (ARDL) approach. African Development Review, 29(2), 272–292.
Matemilola, B. T., Bany-Ariffin, & Nassir, A. (2018). Interaction effects of country-Level covernance quality and debt on stock returns in developing Nations. Capital Markets Review, 26(1), 19–35.
Meng, C., & Pfau, W. D. (2010). The Role of Pension Fund in Capital Market Development. GRIPS Discussion Paper 10–17. Japan, National Graduate Institute for Policy Studies.
Naghavi, N., & Lau, W.-Y. (2014). Exploring the nexus between financial openness and informational efficiency – does the quality of institution matter? Applied Economics, 46(7), 674–685
Narayan, P. K., Sharma, S. S, & Thuraisamy, K. S. (2015). Can governance quality predict stock market returns ? New global evidence. Pacific-Basin Finance Journal, 1–14.
Nawaz, S. (2015). Growth effects of institutions : A disaggregated analysis. Economic Modelling, 45, 118–126.
Oseni, I. O., & Nwosa, P. I. (2011). Stock market volatility and macroeconomic variables in Nigeria: An exponential GARCH approach. European Journal of Business and Management, 2(10), 43-53.
Pesaran. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967–1012.
Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Paper in Economics 0435. Faculty of Economics, University of Cambridge.
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22, 265–312.
Pradhan, R. P., Arvin, M. B., Hall, J. H., & Bahmani, S. (2014). Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: The case of ASEAN countries. Review of Financial Economics, 23(4)., 155-173.
Roe, M. J., & Siegel, J. I. (2011). Political instability : effects on financial development , roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279–309.
Schmukler, S. L., & Raddatz, C. (2008). Pension funds and capital market development: How much bang for the buck? The World Bank Policy Research Working Paper 4757.
Siong Hook Law, & Habibullah, M. S. (2009). The Determinants of Financial Development : institutions , openness and financial. South African Journal of Economics, 77(1), 45–58.
Thomas, A., Spataro, L., & Mathew, N. (2014). Pension funds and stock market volatility: An empirical analysis of OECD countries. Journal of Financial Stability, 11(1), 92–103.
Tunyi, A. A., & Ntim, C. G. (2016). "Location advantages, governance quality, stock market development and firm characteristics as antecedents of African M&As Journal of International Management, 22(2), 147–167.
Ulusoy, V., & Demiralay, S. (2016). Energy demand and stock market development in OECD countries : A panel data analysis. Renewable and Sustainable Energy Reviews, 71(C), 141-149.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748.
Yartey, C. A. (2010). The institutional and macroeconomic determinants of stock market development in emerging economies. Applied Financial Economics, 20(21), 1615–1625.
Published
2021-10-01
How to Cite
OMAR SALIM, Sharifa; MOHD SAID, Rasidah.
Exploring the Nexus Between Pension Funds and Stock Market Development - Does Country-level Governance Matter? Evidence from Global Economies.
International Journal of Advanced Research in Economics and Finance, [S.l.], v. 3, n. 3, p. 126-148, oct. 2021.
ISSN 2682-812X.
Available at: <https://myjms.mohe.gov.my/index.php/ijaref/article/view/15707>. Date accessed: 11 oct. 2024.
Section
English Section
