Stock markets dynamics, financial sector development and corporate capital structure in the GCC countries

Abstract

This thesis investigates the stock markets in the GCC countries from three distinct but related dimensions. First, we empirically explore and identify the main macroeconomic variables that affect the movement of these stock markets. Second, we investigate the impact of stock markets and banking sector developments on the process of economic growth in these countries. Finally, we examine the impact of stock markets’ development on the financing choices of firms operating in these markets and identify the determinants of their capital structure. The three above-mentioned areas of research are motivated by several reasons. First, given that the development of a well structured financial system has taken place in these countries only over the last thirty years, the empirical studies related to the financial development in the GCC countries are rare. Second, GCC countries have been largely ignored in the earlier empirical financial economics literature which bestows originality on our empirical work, specially, in the context of stock market development. The rapid growth in the GCC countries' stock markets over the past two decades raises empirical questions regarding the fundamental connection between stock markets growth and the key macroeconomic variables and how these developments feed into the real economic activities. Third, the GCC countries are non-tax paying entities which make them an interesting case to investigate whether the determinants of the capital structure of firms operating in these markets are similar to those operating in the developed and industrial countries. For example there is not a single published study which examines and compares the capital structure of firms listed in the GCC stock markets or the stock markets development and firms financing choice in these countries. The empirical results reveal the following: (1) both global and local macroeconomic variables affect the performance of stock markets in the GCC countries. (2) Both stock markets and banking sector positively influence economic growth process and they are complementary rather than substitutes for each other. (3) Stock markets in the GCC countries have become more developed and considered an important tool for corporate financing decisions. Moreover, corporate capital structure in these countries can be explained by the determinants suggested in corporate finance models.