| dc.description.abstract | This study examines the relationship between stock market development and economic growth in Kenya. Stock markets in the world individually and collectively play a critical role in the national economies. However, controversies do exist on the role of stock markets in an economy. For instance, Singh (1997) argued that stock market might not be important in attaining higher economic growth while Levine and Zervos (1998) find that stock market development plays an important role in predicting future economic growth.
Empirical evidence linking stock market development to economic growth has been inconclusive even though the balance of evidence is in favour of a positive relationship between stock market development and economic growth. Levine and Zervos (1998) emphasize on the fact that stock market liquidity measured as the value of stock traded relative to the size of the market and the size of the economy is significantly and positively related to the rate of economic growth. Levine (2001) also confirm this similarity of significance in stock market development in the course of economic growth and he argues that the expansion of both banks and stock markets significantly affects growth. The literature survey reveals that some key factors that explain economic growth are as follows: initial level of development, which is proxied by real income per capita; gross investment to GDP ratio; macroeconomic instability, which is proxied by inflation rate. Stock market development and institutional factors are also identified in the literature as critical determinants of economic growth.
This study has used data from 1990 - 2010 and has employed a regression model technique. The target population for this study is the Nairobi stock exchange as an organisation and the performance of the overall economy is targeted and measured by the growth in GDP. The objective was to establish the relationship between stock market development and economic growth in Kenya. From the results, it was revealed that there was a positive relationship between stock market development indicators and economic growth in Kenya. Thus, the study lends support both to the financial intermediation literature as well as to the traditional growth literature. The study used Granger causality test to establish the link between stock market development and economic growth in Kenya (i.e. whether stock market development cause
economic growth or itself is a consequence of increased economic growth). The findings exhibited a two-way causality between stock market development and economic growth in Kenya.
The NSE plays an important role in the economic growth of Kenya and the study therefore recommends that the government needs to do much to attract and encourage active participation of stock markets sector. The study recommends that NSE needs to be developed further to enhance domestic resource mobilization. Policymakers should encourage stock market development. The study also recommends that various policies and programs that affect stock markets such as tax, legal, and regulatory barriers need to be addressed. | en |
