Effect of information and communications technology on stock market development: evidence from emerging markets and high-income economies.

• Author: Ngassam, Christopher
• Position: Report

Abstract

This paper investigates the links between information and communications technology (ICT) and stock market development in a sample comprising of high-income and emerging market economies. The empirical results of the least squares dummy variable model confirms that personal computers and internet hosts as the two ICT variables having strong positive effects on stock market development. The results also revealed strong positive effects of market capitalization and credit to the private sector as non-ICT contributors to stock market development. Controlling for income and technological differences, our results lead us to conclude that emerging market economies have already seized an opportunity to leap frog the high-income countries that is, by going straight from underdeveloped networks to fully digitized networks, bypassing the traditional analog technology. As such this leap frogging is positively enhancing their stock markets. Some policy implications are drawn.

1. Introduction

   Numerous studies pertaining to the literature on stock market development have emphasized the impact of several financial and economic variable (see for example, Levine, 1991, p. 1445; Bhide, 1993, p. 2; Atje and Javanovic, 1993, p. 632-38; Harris, 1997, p. 139-140; Levine and Zervos, 1998, p.3-4; Beck, Levine and Norman, 2000, p. 195-93; Arestis, Demetriades and Luintel, 2001, p. 20). A factor that in recent times seems to have a possible strong impact on growth and development of stock markets is the new information and communications technology (ICT): mobile phones, personal computers and internet hosts. At the theoretical level, some studies have presented arguments in favor of the possible beneficial effects of information technology on an economy's financial sector. For example, Levine (1997, p. 942-43) notes that changes in telecommunications and computers, among other factors, influence the quality of financial services and the structure of the financial systems. In additions, the World Bank (1998, p.12) notes that advancements in communication have for long been a major driving force bringing about positive economic changes to many countries. Further, the Human Development Report 2001 (UNDP, 2001, chapters 2 and 3) gives a comprehensive account of how new technologies, including information and communication technology, work for the betterment of an economy. The rapid pace in dissemination of vast amounts of vital information on the performance of stock and financial markets is possibly contributing to the speed of the development of stock markets.

   However, at the empirical level, the literature is still rare particularly in terms that support the theoretical contention as indicated above. One reason for this rarity is the lack of long-term time data series particularly on the modern instruments of ICT (mobile phones, personal computers and Internet hosts) necessary to validate the theoretical contention. While some data have recently been made available on some of the modern instruments of ICT, an empirical investigation into ICT and stock market relationships would perhaps be a modest start to ascertain the impact of new information technology on the growth of stock markets. Such useful attempts would also complement the current discussions on information technology and its role in spreading financial knowledge.

   Thus, the primary aim of this paper is to examine the contribution of ICT on stock market development in emerging markets and high-income economies. To that end, in section two, we discuss some theoretical arguments on information technology and stock market knowledge linkages. A discussion of the estimation methodology, data and empirical findings are presented in section three. A conclusion and policy implications are provided in section four.

2. An Overview of ICT and Stock Market Developments

   One of the support systems of a country's financial market is the stock market. The stock market certainly is important to every individual and firm and the economy in general. Research confirms that countries with more developed financial institutions grow faster, and countries with weak ones are likely to have financial crises, with adverse effects on long-term growth and development. John Hicks (1969, p. 36) argued that the financial system played a critical role in boosting industrialization in England by facilitating the mobilization of capital for immerse works. Several researchers have shown positive evidence of finance-growth relationships. Among the notable works are Goldsmith (1969, p. 1-12), Levine and Renelt, (1992, p. 960-63), Roubine and Sala-I-Martin (1992, p. 5), King and Levine (1993, p. 538-40), Easterly (1993, p. 187), Levine and Zervos (1996, p. 1-3), Levine (1997, p. 723) and Ndikumana (2000, p. 381).

   For long, stock markets were largely concentrated in high-income countries. The transition towards the global economy saw many newer economies developing their own stock markets and making them globally competitive. Many countries around the world are now recognizing the potential benefits of stock markets to their growth and development process. In recent times, stock markets have emerged in some of the low and middle-income economies.

   Table 1 presents aggregate data on stock markets in a variety of income categories. Between 1990 and 1999 stock markets grew rapidly in low and high-income economies. For example, stock market capitalization of listed companies as a share of gross domestic product (GDP) increased from almost 10 to 32 in low-income countries and from 55 to 139 in high-income countries. On the other hand, the number of listed domestic companies showed tremendous increase in the lower-middle-income group of countries during 1990-99 (Table 1).

   Although several factors have been identified in previous studies that contribute to stock market development, to the best of our knowledge, no empirical study has attempted to investigate the relationship between information technology and stock market development. In a recent study Levine (1997, p. 725) concluded that the financial system is shaped by non-financial developments. Changes in telecommunications and computers, among other factors, influence the quality of financial services and the structure of the financial systems (Levine, 1997, p. 68890). In a similar vain, the World Bank (1998, p.16) notes that advancements in communication have long been a major driving force bringing about positive economic and social changes to many countries.

   Following past breakthroughs in communication modes, for example, telephone, telegraph, radio, and television, such instruments have brought profound changes to the conduct of business in many countries globally. The continual advances in communication evident today, for example, fully digitized wireless networks, are bringing about rapid economic and social change in many countries. These new technologies are contributing to the creation of global market place and are also actively contributing to globalization. Many countries are also taking advantage of such technologies and developing their own markets. Although new technologies are being applied to several disciplines, for example, education, environment, income generation and research and development, the financial sector is the one growth area in many countries that is making major use of new technologies in a vast range of financial activities.

   For example, with the growth in worldwide stock markets, many people are getting educated about stock markets and are now investing in stocks traded in a country's stock markets. Investors on the other hand are in a dire need of information about companies, markets and opportunities available to them. Newspapers have for long been the main providers of stock market information. Given the rapid pace of developments taking place in the business sector as well as the increasing demand for vital information by financial markets participants, this mode of communication may not suffice for information hungry investors seeking stock market updates. Thus, the role of new ICT...