Property rights and the stock market-growth nexus

• The effects of property rights protection on stock market-growth nexus is examined.
• The nexus is positive when there is strong property rights protection.
• Similar effect in cases of strong minority shareholders protection and governance.
• The study supports the “better finance, more growth” proposition.

Using threshold estimation techniques, this study examines whether the growth effect of stock market development differs according to the different levels of property rights and minority shareholders protection in a cross-section of 85 jurisdictions during the post-crisis period. The results demonstrate that the impact of stock market liquidity on growth is positive and significant only in jurisdictions where there is high level of property rights protection. Similar effect is discerned in the case of strong minority shareholders protection. Using the market size as a measure of stock market development, the paper also documents a positive growth effect of market size when property rights and minority shareholders protection are strong. However, there is mixed evidence in the low to medium degrees of protection. Further analyses using other broader governance indicators as threshold variables and instrumental variable threshold regressions reaffirm the main findings. The study upholds the “better finance, more growth” proposition and contributes to the identification of thresholds above which institutional quality can positively shape the impact of stock market on economic growth.