To sustain economic growth and development, seamless commerce, investments, and capital raising skills of investors, institutions, and governments are required. Hence, exchange markets are critical for economic growth and development (
Demirgüç-Kunt and Levine 1996). According to
Levine and Zervos (
1996), the size of the stock market is an important factor in stabilising the way capital may be obtained in order to support economic development and investments more effectively. Empirically, the link between stock market development and economic growth has attracted considerable attention, as evidenced by the number of studies in the field conducted by academics. They determined that the link is generally positive in developed economies. The question of why such a link occurs remains unresolved: is it technological progress, the industrialisation impact, the liquidity of capital markets, or does the stock exchange drive the economy? As a result, the current study seeks to answer such concerns using Zimbabwean evidence.
Background
The interconnections between exchange markets and economic growth have been intensively argued in academic circles, conferences, and with policymakers in order to determine which aspects are vital for economic sustainability (
Magweva and Mashamba 2016). Overall, researchers have endeavoured to determine whether the presence of an exchange market contributes to the growth of economies and how listed firms benefit from being listed on the exchange. As a result, many researchers have been interested in the influence of the exchange market on the well-being of nations through economic activities that resulted in the rise of their gross domestic product (GDP) (
Alajekwu and Achugbu 2012). The researchers’ principal attention has been centred on two factors, the first being whether there is a link between stock market activity and economic growth within these concepts. The second feature is the type or, if existent, the direction of the causal connection. For example, the test may determine whether the causation direction of the variables under consideration is unidirectional, bidirectional, or independent. If it demonstrates independent causation, it suggests that the variables, namely stock market development and economic growth, are not linked to or do not cause each other (
Şendeniz-Yüncü et al. 2018). Over the years, there has been debate about the connection between organised exchange markets and economic growth. To date, neither side has reached a definite conclusion about the theoretical or empirical link between the two. The supply-leading hypothesis contends that developing financial systems leads to economic growth by channelling savings into investments. According to
Hailemariam and Guotai (
2014), the functioning of the stock market is a necessary financial instrument for economic growth in any given economy. Furthermore,
Bongini et al. (
2017) explained that economies with well-functioning financial markets grow faster and ease the financing constraints that affect the expansion of firms and industries that are essential for economic growth. These findings are similar to those of (
Elfeituri et al. 2023), and they are evident in the ZSE’s mission, which prioritises capital and risk management.
The role that stock markets are thought to play as financial intermediaries, including mobilising savings, reducing risk, and long-term capital investment (
El-Masry 2006;
Antoniou et al. 2008), has generated controversy regarding the impact of stock market growth over the years. The ZSE is no exception to this rule.
Bhowmik and Wang (
2020) concluded that the stock market is a fundamental insulin in the economic activities in the modern world. It is a gauge meter used to test the economy’s well-being among a given calamity because it is the first market to send a signal of the growth or cycle of the business trends to the policymakers. Thus, the volatility of stock index returns is an important variable to measure adversity in an economy.
Chaudhary et al. (
2020) strengthened the claim that uncertainty in the markets is a view of the volatility of the stock markets, which has the highest bearing on investment and portfolio management analysis. Volatility indicates an economy’s instability.
There are 29 stock exchanges in Africa; the Johannesburg Stock Exchange (JSE) is the largest, with a market capitalisation of USD 1.36 trillion, followed by the Nigerian Stock Exchange (NSE), which has a capitalisation of USD 66.7 billion. Furthermore, the Casablanca Morocco Stock Exchange has a capitalisation of USD 65.3 billion (
Onyango et al. 2023). Given that the stock exchanges hold substantial amounts of market liquidity, studies linking them to increases in the GDP in the respective countries have found an exponential expansion in their use. According to
Levine and Zervos (
1996), an effective financial system is a prerequisite for economic progress. The importance of banks and the stock market in an economy was emphasised by
Beck and Levine (
2004), who also noted that these factors are consistent with the theory. This implies that a sound financial system distributes wealth to productive sectors that require capital to fund the production of goods and services that stimulate economic growth.
The smooth operation of the financial system is particularly important to Zimbabwe’s economy. The capital market enables corporations to raise money by issuing shares, while banks are responsible for supporting economic operations by giving loans. Governments issue bonds to ensure economic sustainability. With a market capitalisation of ZWL 741 billion and a market turnover of ZWL199 million as of 2 July 2021, Zimbabwe is one of the oldest stock exchanges in the world. It was created in 1894 (
Zimstat 2021).
The stock exchange is where participants may trade shares and other financial securities in a highly regulated and safe atmosphere (
Mabilesta 2016). As a result, traders will conduct business with a high degree of confidence and little danger (
Chen et al. 2020). The stock market operates as either a primary or secondary market, each governed by specific regulations enforced by the authorities. As a primary market, it is where new shares are issued, enabling businesses to sell their stock to the general public through the process of an IPO (
Beck and Levine 2004). Considering their massive stock market valuations and crucial roles in the financial system, policymakers and experts have been compelled to investigate whether they were associated with economic development.
Chen et al. (
2020) showed that while long-term productive investment projects need a high level of liquidity commitment, savers do not need to keep their assets for an extended period. As a result, equity markets alleviate this strain by providing savers with an asset that they can rapidly and inexpensively sell (
Şendeniz-Yüncü et al. 2018). The current analysis adds empirical information about the stock market and GDP growth to the corporate finance literature. Theoretically, trading in the stock market influences liquidity, risk diversification, business information acquisition, corporate control, and savings mobilisation (
Dube 2020).
By marginally altering the quality of the service provided by the currency market, the rate of economic transmission to GDP growth will be influenced positively. There is inconsistency in the empirical data; other studies have discovered that the stock market negatively influences economic growth (
Arcand et al. 2015;
Demetriades and Rousseau 2016;
Rousseau and Wachtel 2011), while others affirm a favourable effect (
Demirgüç-Kunt and Levine 1996;
Greenwood and Jovanovic 1990;
Greenwood and Smith 1997;
Levine and Zervos 1998). As a result, the current study intends to retest the influence of stock markets using the dataset of Zimbabwe, a nation characterised by an unstable economy, price volatility, high inflation rates, an uncertain political climate, and an unpredictable economy. The findings of this study are mainly concerned with the sign and question of causation among the variables of the investigation, which include the stock market, liquidity, and economic growth. Furthermore, the study adds to the body of knowledge via corporate finance literature for analysing the influence of exchange trade markets on unstable economies. Additionally, statistical and conceptualisation challenges must be resolved. This is due to the empirical data indicating that the stock market is vital for economic growth. In contrast, previous research used cross-sectional analysis, which suffers from the problem of cross-country growth regressions. This is because the regression analysis assumed that the observations were obtained from the same population but were taken from widely different nations, necessitating a single country analysis. Additionally, the study employed single nation analysis, focusing on Zimbabwe. As countries are dynamic, particularly in this age of the fourth industrialisation, policies change regularly, economies are affected differently, business cycles change regularly, and governments rise and fall. Consequently, the study answers the conceptualisation problem as the coefficients of the regressions must be interpreted cautiously if cross-country analysis is utilised. This is because, when averaged across lengthy periods, these nations are influenced by various developments that may or may not occur concurrently, as indicated above. As a result, aggregation obscures essential elements, occurrences, and disparities between nations. As a result, the study will address the statistical and conceptual challenges by examining Zimbabwe’s economic growth using the time series economics model, Vector Autoregressive (VAR), to investigate the link between the stock market and economic growth. In addition, compared to a cross-country study, a single country analysis overcomes the question of causation.
Considering Zimbabwe’s economic circumstances, which include high inflation, political instability, unemployment, and economic destabilisation, the current study tries to determine whether stock market liquidity influences economic growth in Zimbabwe as stock markets have been empirically shown to be a major factor in stable nations’ economic growth. In light of this, does the stock market contribute to economic stability regardless of the state of the economy?