adminBRIC countries are significant contributors to world trade and investment, yet their institutions have a history of poor performance and variable quality. Their stock markets are important destinations for global capital and are subject to a range of institutional influences. Corruption is one of these. It is associated with a wide variety of economic and financial outcomes including higher risk, lower returns, and reduced growth (Kohl and Popov 2009; Saha et al., 2010; Rock and Luca 2011).
It is also known that a number of factors can interact to change the effect of corruption on growth and stock market returns. We explore this in our study using Arellano-Bover/Blundell-Bond linear dynamic panel data estimation resolving endogeneity by introducing lagged terms of the dependent variable. The results show that individual institutional factors such as democratic accountability and bureaucratic quality interact with corruption to mitigate its negative effects on SR. However, the interaction between law and order with corruption has a more sand in the wheel effect: the corruption induced distortion of law and order increases the cost of business by slowing down bureaucratic processes such as issuing property certificates or permits for factories. It therefore lowers SR.
Corruption is thus negatively correlated with SR and reduces stock market returns. This is a concern because it raises the costs of production, creates uncertainty and risk on the supply side and undermines trust in investors. This is especially damaging for the economies of BRIC countries which seek to attract foreign investment to support growth.
