Stock Markets, Banks and Economic Growth: Some Evidence on the Role of Stock Price Informativeness

71 Pages Posted: 26 Aug 2011 Last revised: 2 Nov 2011

See all articles by Fang Chin Cheng

Fang Chin Cheng

University of New South Wales

Ferdinand A. Gul

Deakin University - Department of Accounting

Date Written: August 26, 2011

Abstract

This paper extends the economic growth model tested by Levine and Zervos (1998) by including a measure for capital allocation efficiency proxied by stock price informativeness. Using a sample of 59 countries, this study finds that stock price informativeness as measured by firm-specific return variation is positively associated with economic growth after controlling for variables in the Levine and Zervos’s (1998) model. However, when we split the countries into emerging versus developed countries, we find that stock price informativeness acts as a substitute for banking development and stock market liquidity in predicting economic growth in emerging countries but not in more developed countries. These results are consistent with the Roll’s (1988) claim: more information-laden stock prices signal efficient stock markets and, therefore, stronger economic growth.

Keywords: Stock price informativeness, Capital allocation efficiency, Firm-specific return variation, Economic growth, Capital Inflows, Ordered probit

JEL Classification: C01, C32, C33, C35, C58, C61, C87, E22, E44, E51, E62, F15, F18, G01, G12, G15, H52, P14, P43

Suggested Citation

Cheng, Fang Chin and Gul, Ferdinand A., Stock Markets, Banks and Economic Growth: Some Evidence on the Role of Stock Price Informativeness (August 26, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1917328 or http://dx.doi.org/10.2139/ssrn.1917328

Fang Chin Cheng (Contact Author)

University of New South Wales ( email )

Level 3, West Wing
Australian School of Business
Sydney, NSW 2052
Australia

Ferdinand A. Gul

Deakin University - Department of Accounting ( email )

Melbourne
Australia

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