A comparative analysis of stock market development: The impact of formal and informal institutions

In light of theory and evidence that the functioning of stock markets affect firm's financing decisions, and economic growth, we aim to link institutional quality to capital markets. In that respect, we analyzed 3,244 newspaper articles to run a comparative empirical analysis on the relation between the mindset of a population towards capital markets, as a proxy for informal institutions, the Heritage Foundation's Index of Economic Freedom, as a proxy for formal institutions, and stock market development in Austrian and Poland. Our results show positive and significant direct effects of formal and informal institutions on stock market development, where both differ for Austria and Poland. Furthermore, we theoretically explain and empirically examine how both institutional dimensions interact with each other, by showing that the societal mindset of a population towards capital markets positively influences the relation between formal institutions and stock market development.