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Nascent stock exchanges — tales of success and failure

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Public equity markets are seen as a critical component of a developed financial system, with such markets going back to the 18th and 19th century in many advanced economies.  There have been therefore intensive efforts of donors and local government to establish such markets across the developing world, in the 1980s across Sub-Saharan Africa and in the 1990s across many transition economies.  These efforts, however, have been met with mixed success, illustrated by the statement by a local market practitioner that “an entire year’s worth of trading in the frontier African stock markets is done before lunch on the New York Stock Exchange.”1 On the other extreme are markets such as China, which have developed rapidly over the past two decades, with many listed companies, high trade volume and a broad investor basis.  What explains why some countries have well-developed public equity markets while others have shallow and illiquid markets?

In recent research, we explore conditions for the successful establishment and development of public equity markets across a sample of 59 developing countries that have opened a stock exchange since 1975 (Albuquerque de Sousa et al., 2016). Specifically, we use three measures of stock market development, widely used in the financial development literature and widely available:

  • Market capitalization to GDP captures the total outstanding stock at the exchanges of a country divided by real economic activity and thus proxies for the size of the stock exchange.
  • Turnover ratio captures how often the average share changes hands in a given year and is an indicator of the liquidity of the stock market.
  • Number of firms listed on the stock exchange focuses on the diversification potential of stock exchanges, but also on the importance that the stock exchange has for the real economy.  

We apply cluster analysis to the three success measures for the 34 markets in our sample for which values of the success measures are available in the first 20 years after establishment. Figure 1 plots all 34 nascent markets in this sample along the three dimensions of success as measured after 16-20 years. The x-axis represents the number of listings, the y-axis represents turnover ratio, and the diameter of the circles indicating the individual markets represents their market capitalization to GDP. The names of the corresponding countries are depicted in each circle.

Separating the success from the failures…

We find a clear distinction between two clusters of nascent markets (indicated in different colors): a cluster of markets with a relatively high number of listings, large market capitalization, and high turnover, and a cluster of markets with relatively low values for each of these measures. China and Swaziland are the two extremes along the three dimensions of success. China has the most successful stock market, with an average of 1,477 listed companies (Shanghai and Shenzhen combined), market cap representing 77% of GDP, and turnover of 130% over the period of 16-20 years. Swaziland is the least successful market, with an average of 6 listed companies, market cap representing 8% of GDP, and almost no trading activity (turnover is close to 0%) in the fourth 5-year interval after establishment.

Figure 1: Successes and failures among nascent stock exchanges

 Successes and failures among nascent stock exchanges


It’s all in the beginnings…

We use necessary condition analysis (NCA), as developed by Dul (2016), to assess the importance of initial success for long-term success. While traditional paradigms of multi-causality presume that each determinant is sufficient to increase the outcome but none is necessary, under the NCA paradigm, the focus is on determinants that are necessary for success, independently of the value of the other determinants. Our analysis shows:

  • A minimum number of listings and turnover in the first five years are necessary conditions for success along both of these dimensions after 20 years. Stock markets that start out with few listings and low trading activity fail to attract a considerable number of listings and to spur adequate trading activity in a later stage, and run the risk of quickly becoming dormant.
  • There is little evidence that the initial market capitalization is a necessary condition for long-term success.

What explains success and failure?

To test the effect of different institutional, structural, socio-economic, and policy factors, we use cross-sectional regressions that relate country characteristics to success 15 years later as well as panel regressions that relate time-variant macroeconomic and other country factors to the success of public equity markets. We find that:


  • The long-term success of nascent stock markets is mostly explained by their early success, and by the environment in which they are established, which together explain more than 60% of the variation in success 15 years later.
  • The size of the banking sector at the moment of stock market formation is the most reliable predictor of its success. A 1% higher private credit provided by the banking sector and other financial institutions is associated with a 1% higher number of listed companies, a 0.4% higher market capitalization (% GDP) and a 0.7% higher turnover ratio 15 years later.
  • Panel regressions point to the development of national savings over the life of the stock market as the most important predictor of stock market success.


While our findings do not speak directly to the public policy rationale for establishing public equity markets, they explain why efforts to establish such markets have not always been met with success. Scale is an important factor, with a large number of listed firms and sufficient liquidity being a critical condition for long-term success. But it is not only about a sufficiently large number of firms ready to go public and share control with a diverse set of owners, but also investor demand, as seen in a sufficiently large national savings rate that is critical for long-term success of nascent stock exchanges. This points to serious challenges in establishing public capital markets in small and low-income countries.  Our analysis suggests that alternatives such as developing the private equity industries, less formal intermediation systems or joining a regional stock exchange might be more promising than copying the stock exchange model of advanced economies.


Albuquerque de Sousa, J., T. Beck, P.A.G. van Bergeijk, and M.A. van Dijk. 2016. “Nascent markets: Understanding the success and failure of new stock markets,” CEPR Discussion Paper 11604.

Christy, John H. (1998):  “Bright Spots on the Dark Continent.” Forbes , October 5.

Dul, J., 2016, “Necessary condition analysis (NCA): Logic and methodology of “necessary but not sufficient” causality,” Organizational Research Methods 19, 10-52.

1 John Niepold, quoted in Christy (1998)


Thorsten Beck

Professor of Banking and Finance, Cass Business School

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