The impact of globalization and the legal system on stock market quality

Haejung Na and Soonho Kim

Applied Economics, 2022, vol. 54, issue 36, 4203-4212

Abstract: This study examines how globalization affects stock market quality, whether investor protection serves as a channel in this relationship, and how the channel effect varies depending on the legal system. Our empirical analysis confirms that there is a positive causal relationship between globalization and market quality. Also, since we find that globalization induces stronger investor protection, we disentangle the component of investor protection predicted by globalization. Our analysis shows that the globalization-induced component of investor protection has a significantly positive effect on market quality, which demonstrates the role of investor protection as a channel. Finally, we show that these relationships among globalization, investor protection, and market quality are present in civil law countries but not in common law countries. This illustrates that globalization enhances financial market quality via a stronger ability to effect institutional change and investor protection in civil law countries.

Date: 2022
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DOI: 10.1080/00036846.2022.2026869

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