Financial market development is important to the economic growth of most emerging economies. The relevance of financial markets is in respect of their ability to affect investments by reducing financial constraints and making capital available to businesses. Well functioning financial markets allow firms to acquire capital to be channeled into profitable projects or invested in response to increased demand for output (Ndikumana, 2003). The comparative merits of stock market-based systems and bank-based systems in mobilizing resources and enhancing economic growth have been debated for some time now (see Levine 2002). However, little is known about financial markets and investment in emerging countries’ perspective. Emerging financial markets are critical considering the role they are expected to play in spurring investment growth in these countries.
This paper contributes to the literature by examining the relative importance of stock market based and debt market-based financial systems in influencing investment opportunities in emerging economies. This study is based on a sample of thirty four countries covering the period 1990 – 2006. The analysis uses a dynamic investment model including lagged investment, indicators of stock market-based and debt-based financial systems, per capita GDP, and other control variables that affect investment opportunities.
The main findings of this study are that, capital markets and banks are positive predictors of investment growth. In addition, there is complementarity between capital markets and banks in providing credit for investment growth. This paper makes important contributions to the extant literature on the effect of financial markets on investment opportunities. It identifies stock markets and debt markets as significant in influencing the future investment decisions of firms in emerging economies.
The rest of the paper is structured as follows; Section 2 provides an overview of related literature on financial markets and investment. Section 3 deals with the estimation method. Section 4 discusses the results and section 5 concludes the study.
