Participation Matters

Equity markets are becoming an intricate part of economic growth. They provide a source of capital, among other things, that companies may use to grow, innovate, and compete in a domestic or the world market. With the increase of equity markets and their implications of economic growth there has been some recent research on the valuation of equity markets. Many of the political, economical, and institutional factors that are suggested to influence equity market valuation have been extrapolated from the research on bond markets and FDI. While concurring with many of the factors already discussed in the literature, this thesis suggests that a factor is missing in the analysis. I claim that stock market valuation is conditioned on the domestic stock market participation level within that country's stock market. I contend that an increase of stock market participation by the domestic populace, conditioned on the type of regime, will increase the valuation of the equity market of that country.