The impact of perceived corruption levels in public sector on stock market development

Abstract

Most of the empirical studies that analyze the impact of corruption on the economy suggest that corruption is a serious obstacle against economic growth. However, it is ambiguous whether corruption has negative effect on the financial sector, especially stock market development. Thus, the first objective of this paper is to reexamine the relationship between corruption and stock market development. Furthermore, several previous literatures argue that democracy potentially mitigates the negative effect of corruption on economic growth. By this argument, the second goal of this paper is to investigate whether democracy has influence on mitigating the negative impact of corruption from stock market development. This study employs the Generalized Method of Moments (GMM) estimator for regression analysis of cross-counties panel data, covering 10 years period from 2011 to 2020. Corruption is found to have significant and positive effect on stock market development in terms of size. Additionally, it is found that the influence of democracy on corruption is significant and positive to stock market growth. When stock market liquidity is used as a proxy of stock market development, it is found that corruption has no significant effect on stock market development. Moreover, democracy is found to have no significant influence on the relationship between corruption and stock market development.