Levine, Ross and Sara Zervos, "Stock markets, banks, and economic growth", World Bank Policy Research Working Paper Number 1690, December 1996
Do well-functioning stock markets and banks promote long-run economic growth? This paper shows that stock market liquidity and banking development both positively, predict growth, capital accumulation, and productivity improvements when entered together in regressions, even after controlling for economic and political factors. The results are consistent with the views that financial markets provide important services for growth, and that stock markets provide different services from banks. The paper also finds that stock market size, volatility, and integration with world markets are not robustly linked with growth, and that none of the financial indicators is closely associated with private saving rates.
The data is in Excel and Lotus format and includes the following variables:
- APT Integration and CAPM Integration: Measure of each stock market's integration with world equity markets based on Arbitrage Pricing Theory and the Capital Asset Pricing Model respectively (Sources: Korajczyk, 1996, 1994)
- Bank Credit Stock of credit by commercial and deposit-taking banks to the private sector divided by GDP (Source: International Monetary Fund's (IMF's) International Financial Statistics)
- Black Market Premium: Black market exchange rate premium (Sources: Picks Currency Yearbook through 1989 and then World Currency Yearbook )
- Capital Stock Growth. Growth rate in capital stock per person, available through 1990 (Source: King and Levine, 1994)
- Capitalization Average value of listed domestic shares on domestic exchanges in a year divided by GDP that year (Source: IFC's Emerging Markets Data Base (electronic version) and the IMF's International Financial Statistics)
- Government. Government consumption share of GDP (Source: IMF's International Financial Statistics and World Bank's World Development Indicators)
- Inflation Rate of change in the GDP deflator, if unavailable, consumer price index is used (Source: IMF's International Financial Statistics and World Bank's World Development Indicators)
- Initial Output Logarithm of real per capita GDP in 1976 (Source: IMF's International Financial Statistics and World Bank's World Development Indicators )
- Enrollment Logarithm of the secondary school enrollment rate in 1976 (Source: IMF's International Financial Statistics and World Bank's World Development Indicators)
- Output Growth . Growth of real per capita gross domestic product (Source: IMF's International Financial Statistics)
- Productivity Growth Output Growth minus 0.3 times Capital Stock Growth, available through 1990 (Source: King and Levine, 1994)
- Revolutions and Coups Number of revolutions and coups per year, averaged over the 1980s (Source: Arthur S. Banks, 1994)
- Savings Gross private saving as a percent of GDP, available from 1982 onward for countries classified as "developing" by the IMF and for the entire sample period for industrial countries (Source: Masson et al., 1995)
- Trade Exports plus imports divided by GDP (Source: IMF's International Financial Statistics and World Bank's World Development Indicators)
- Turnover Value of the trades of domestic shares on domestic exchanges over the year divided by the average value of domestic shares listed on domestic exchanges in that year.
Note: the file also contains additional tables in a file called ANNEXES.EXE or ANNEXES.ZIP (depending on which file is downloaded below). A description is included in the file.
Annexes for “Stock Markets, Banks, and Economic Growth”
The following four annexes contain additional sensitivity analyses for the paper “Stock Markets, Banks, and Economic Growth” by Ross Levine and Sara Zervos. Note, some of the variable names differ slight from those in the main text. Specifically, LRGDP=Initial Output; LSEC=Enrollment; REVCOUP=Revolutions and Coups; GOVI=initial value of Government; PII=initial value of Inflation; BMPI=initial value of Black Market Premium; BANKI=initial value of Bank Credit; TORI= initial Turnover; TVTI=initial Value Traded; MCAPI=initial Capitalization; VOLI=initial Volatility; CAPM=CAPM Integration; APM=APT Integration. Also, variables without the subscript “I” indicate that the value is averaged over the sample period, instead of an initial value. Also, in these regressions the CAPM and APT Integration measures have opposites signs to those in the main text.
Annex A: Changing the Conditioning Information Set
This Annex examines whether the results in the body of the paper are sensitive to changes in the combination of included regressors. As demonstrated in the 24 tables, the results are not sensitive to alternative constructions of the conditioning information set.
Annex B: Another Liquidity Measure
This Annex examines whether an alternative measure of stock market liquidity yields similar results. Here, we construct the liquidity indicators as the value traded ratio (total value of domestic equity transactions divided by GDP) divided by stock return volatility. This variable is called LIQGLCI. Large values of this liquidity indicator signal substantial trading relative to price changes. More liquid markets should support more trading with less price movement than less liquid markets (holding all else equal). There are many fewer countries with data on stock return volatility data than trading data. Moreover, high volatility may simply reflect the frequent arrival of information irrespective of transaction costs or the volume of trading. Put differently, all else may not be equal. Nonetheless, as shown in the table, this liquidity measures is also robustly linked with future economic growth.
Annex C: Contemporaneous Regressions
This Annex examines whether the results in the body of the paper are sensitive to the use of initial values. The initial value regressions regress the value of the growth indicators averaged over the 1976-1993 period on the values of the financial indicators measured in the initial year, 1976 (data permitting). With the more traditional contemporaneous regressions, we regress the value of the growth indicators averaged over the 1976-1993 period on the financial indicators also averaged over the 1976-1993 period. As illustrated in the following 5 tables, the contemporaneous regressions yield very similar results.
Annex D: Outlier Regressions
This Annex investigates whether the results in the body of the paper are sensitive to the removal of “outliers.” We use two procedures of identifying outliers. First, we use the procedure for identifying influential observations suggested by Belsley et al. (1980). This procedure identifies countries that exert a large effect on each equation’s residuals. As summarized in the following tables, removing these countries does not affect our conclusions. Second, we simply plot the two-dimensional relationship between each of the growth indicators and the stock market indicators after controlling for the other regressors. We then subjectively remove countries that seem to dominate the estimation results. Removing influential observations importantly weakens the relationship between the growth indicators and market size. The other results are not affected as illustrated in the following tables.
Annex E: More Countries Regressions
This Annex shows that, when we substantially enlarge the sample of countries by including countries where we impose zero for stock market liquidity and size, the results in the paper do not change on capital accumulation and productivity growth.