Interaction Effects of Institutional Quality and Financial Development on Stock Market Performance

Abstract

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The paper explores the dynamics between institutional quality and financial development and its impact on stock market performance based on secondary data collection of six economies (three advanced and three emerging economies) between 2000-2020. The quality of the institutions, which is gauged by the governance, regulatory regimes, and rule of law, will offer confidence to the investors and a stable market, whereas financial development, measured by variables like the capitalization value of the stock market, the turnover ratio of the stock market and the credit of the private sector will increase the depth, liquidity, and efficiency of the market. The analysis is conducted with the help of panel data regression models that analyze the moderating effect of institutional quality on the relationship between financial development and the performance of a stock market. Its findings suggest that the quality of institutions pivots the positive effect of financial development on stock market performance especially in those countries where the governance system is well established. This insight underscores the significance of the joint reforms which will improve not only institutional structures but also the development of the financial sector in order to maximize the performance of the market.