Corruption affects economic outcomes in various ways including lowering firm productivity reducing investment opportunities and increasing risk for foreign investors. It also increases the cost of running a business by forcing businesses to pay for special payments and bribes. These costs are passed to consumers in the form of higher prices and lower profits. Moreover, corruption undermines investor confidence resulting in weaker stock market performance. Corrupt governments may even suffer from debt crises that put critical national programs at risk.
In addition, investors are likely to withdraw from a country with high levels of corruption. These factors reduce a country’s attractiveness as a place to invest, which negatively affects its economy.
As a result, the government’s budget deficits increase and a stock market crash ensues. This calamity can be the catalyst for political instability and civil unrest, which can lead to a national crisis. This is what happened in 1929 when Wall Street cartels rigged the market and caused the Great Depression.
This article uses a panel data model to study the effect of corruption on stock market growth (SR) in the presence of institutional factors such as democratic accountability, law and order and bureaucratic quality. The model reveals that a one point increase in the level of corruption has a negative impact on SR. However, the negative effect becomes smaller as democracy matures within a country. The interaction effect with DA is positive and significant indicating that an increase in DA has a greasing the wheel effect on SR.