Institutional Investors and Stock Market Development: A Causality Study

Abstract

This article examines causality relationships between institutional investors and stock market development based on the panel data compiled from 23 OECD countries for the years 1982 through 2000. In order to test causality relationship, Sims' causality test based on Granger definition of causality was used in our study. Our empirical results provide evidence that there are statistically significant positive relationship between institutional investors and stock market development. The development of institutional investors is the Granger cause of stock market capitalization, whereas there are bi-directional causality relationship between institutional investors' development and stock market liquidity. Research results support the idea that a country should promote the development of institutional investors for the establishment of well-developed securities market.

Keywords: institutional investor, institutional investor development, stock market development, financial development, Granger causality

JEL Classification: G20, E44, G10, G22, G23