Impacts of Stock Market Performance on Firms’ Growth: With Reference to South Africa

Multiple of factors such as technological innovation, public policy and market landscape, the nature of competitions, firms (cost) structures, firms' strategies, stock market performances managerial skills and other indigenous and exogenous factors have an explicit and implicit influence on firm's growth. A wealth of literature indicates that there is a divergence of thoughts on the direction and the extent of these various factors on firms' growth. There is a divergence of views on whether the relative impacts of stocks market performance on firms' growth could be identified, and what are the best practices to capture such lines of thoughts? And hence disentangling the impact of stock market performance on firms' growth is particularly open-ended and disputable. With this context, the key purpose of this article is to examine the impact of stock market performance on firm's growth in order to address the pillar questions raised above by considering the South African stock market as a case study. The data utilized for this study includes quarterly observations ranging from 2001Q1 to 2015Q4. Time series methods are applied with the purpose of empirically testing the impact of stock market performance on firms' growth. The empirical testing process involves Johansen's co-integration technique which is employed in order to establish the co-integrating nature of the relationship between the two previously mentioned variables. In addition, a Vector Error Correction Model (VECM) is utilized to ascertain the long-run dynamics of the link between the two variables. The evidence obtained from the empirical testing for a sample of sixty observations suggests that the performance of stock markets have a significant long-run impact on firms' growth. The insightful results we obtained using the parsimonious methods reinforce and significantly support the view that stock market performances have a substantial impact on firms' growth in the long run.