Academic journal article Business: Theory and Practice

Corruption and Stock Market Development: New Evidence from GCC Countries

Academic journal article Business: Theory and Practice

Corruption and Stock Market Development: New Evidence from GCC Countries

Article excerpt

Introduction

Factors affecting stock market development in many countries have received a great deal of attention, especially Latin America, Middle East and Central Asia, which have shouldered an increasing share of world growth. Recently, a number of papers have examined the impact of corruption on stock market development (see Ng 2006; Pinheiro 2010; Bolgorian 2012; Jain et al. 2012; Lau et al. 2013; Shahbaz et al. 2013; Tvaronavi?ien? et al. 2013, 2014; Chene 2014; Giri?nas, Mackevicius 2014; Peker et al. 2014; Sabaseviciene, Grybaite 2014; Caurkubule, Rubanovskis 2014a, 2014b; Raudeliuniene et al. 2014; Kaminskiene et al. 2014; Tuncikiene, Korsakiene 2014; Kanapinskas et al. 2014; Tuncikiene, Drejeris 2015), but little interest was given to the impact of corruption on stock market development in Gulf Countries Council (GCC), the richest countries in Middle East.

Many definitions are offered for corruption. The Enterprise Survey of World Bank defines corruption "the percentage of informal payments to public officials". Jain (2002) describes corruption as "an act in which the power of public office is used for personal gain in a manner that contravenes the rules of the game".

Although corruption is a variable that cannot be measured directly, in recent years, some organizations have provided corruption indices across a wide range of countries based on surveys to qualitatively assess the level of corruption. These surveys are based on different criteria. Some are assessed by country risk analysts based in the home country or abroad while others are surveys of local or expatriate businessmen. Others are surveys based on local residents. Ng (2006) assures that the three most popular surveys are from the Economist Intelligence Unit, International Country Risk Guide, and Transparency International's Corruption Perception Index (CPI).

One of the most renowned indices is the Corruption Perception Index (CPI) published by Transparency International. This index is defined as "abuse of public power for private benefit" (see Freckleton et al. 2011); it is an aggregate indicator that classifies countries based on the degree to which corruption is perceived to exist among politicians and public authorities.

The aim of this paper is to examine the impact of corruption on stock market development in GCC. We explore the correlation between CPI and stock market development; employing market capitalization as a proxy for stock market development. The study covers a sample period from 2003 to 2011 of six members of GCC, using pooled regression, random and fixed.

The main contribution of this paper to the ongoing discussion in the literature lies in two points. First, it investigates the impact of corruption on stock markets development focusing exclusively on GCC countries. It is interesting to investigate this relationship in such group of homogeneous countries considering the unique characteristics of these countries combining richness with relatively high level of corruption. This is important since many studies neither distinguish between developing and developed countries in their tests nor consider the special characteristics of certain groups within each category. This is reflected in many challenging and conflicting results. Second, this paper challenges the view that perceptions-based measure of corruption is not good enough as a measure of corruption. Perception-based measures have been criticized on argumentative and empirical grounds, causing some researchers to resort to other measures or proxies that fit better into their econometric models. However, this does not seem to be the case with GCC as perceived levels of corruption perform rather well in explaining the variation in financial market development.

The paper is structured as follows. Section two provides a brief review of theoretical and empirical Studies on the impact of corruption on stock market development. …

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