The impact of capital markets on economic growth of Sri Lanka

Abstract

Capital markets plays an important role and influence over the prosperity, development and economic growth of both developed and emerging economies. The purpose of this study was to determine the impact of capital markets on economic growth of Sri Lanka. To achieve the set objectives, the study employed a quantitative research methodology using six stock market performance indicators and one economic growth measure. A longitudinal study was conducted adopting a case study approach, for a period of two decades (1998 – 2019) distinguishing Sri Lanka’s war and post-war eras. The data was analysed using Correlation Analysis and Multiple Regression. The main results showed equity market turnover, market capitalization, share turnover to market capitalization ratio and dividend yield had a positive relationship with gross domestic product while All Share Price Index and debt market turnover had no relationship with gross domestic product. The study indicates overall market is essential, high liquidity stocks, efficient stock market performance and debt trading liquidity are important for the economic development of Sri Lanka. The value of businesses and stock market size determines the economic growth of the country. The Sri Lankan government needs to maintain a peaceful, conducive environment for investors, ensure secure functionality of capital markets that will help implement socio-economic policies to promote better living standards in the country. The study contributes to the existing empirical literature on capital markets and economic growth, especially with reference to Asian markets, and Sri Lankan stock market formerly ranked as one of the best performing stock markets in the world.