Do Stock Markets Matter in Investment Growth in Africa?

The paper investigates the effect of stock market prices on investment growth using dynamic panel data analysis of selected African countries. In line with theoretical expectations investment responds positively to increases in stock prices. Further analysis based on interaction terms reveals that the sensitivity of investment to stock prices increases with stock market development. The paper also finds that even without the inclusion of the most sophisticated market-South Africa, the positive relationship between investment and stock market prices continues to exist in the smaller markets. The findings underscore the importance of stock markets to investment formation in Africa.