Investigating the Nexus between Stock Market and Institutional Quality in Emerging Markets and Developing Countries: A Panel Data Analysis

Purpose: This study empirically explores the impact of institutional quality on the stock market in Emerging Markets and Developing Countries (EMDC), study utilizes individual institutional quality indicators as well as aggregated in the form of an institutional quality index and checks their impact on the stock market.Methodology: The study employs a sample of 43 Emerging Markets and Developing Countries for the time duration from 1996 to 2022. By applying the Generalized method of moments (GMM) and Principal Component Analysis (PCA).Findings: The result shows that Institutional quality is not good in these countries and plays a detrimental role in association with the stock market. Mostly individual indicators of institutional quality have a negative and significant impact on the stock market except voice and accountability have a positive and significant impact on the stock market. We also construct an Institutional quality index by applying Principal component analysis (PCA), which also has a negative impact on the stock market.Implications: The findings underscore the importance of institutional factors in shaping the financial development of nations. Through our analysis, it becomes evident that emerging markets and developing countries (EMDCs) should prioritize enhancing their institutional frameworks, as these play a pivotal role in influencing financial development.