An assessment of the effect of institutional quality on stock exchange performance

Abstract

Institutions as key drivers of economic prosperity have become a widely researched area. This research sought to assess the impact of institutional quality on stock exchange performance in the developing and developed contexts using South Africa and the USA as respective case studies. The research indicates that not all institutional quality variables are key drivers to stock exchange performance. The institutional quality variables which significantly affect stock exchange performance differs across contexts. The relationship is, however, not straightforward with results indicating that stock exchanges still grow in environments of poorly performing areas of institutional quality. Developing countries have an increased number of interrelated institutional quality variables implying less independence of institutions. In this developing context, factors such as political stability, regulatory quality and rule of law affect stock exchange performance. Additionally, businesses can thrive in environments of decreased regulatory quality and rule of law in developing countries and in environments of decreased control of corruption in developed countries. Stock exchange performance is enhanced by political stability in developing contexts and rule of law in developed contexts. The study demonstrates that context is an important factor when analysing the effect of institutional quality variables on stock exchange performance. Businesses need to therefore adopt multi-pronged approaches, involving institutional strategies as a key area, when operating in different environments.