5. Conclusion
This paper studies the effect of stock market liquidity on the level of income inequality. While Levine and Zervos (1998) show that stock market liquidity is directly associated with economic growth, we seek to determine whether liquidity-induced growth disproportionately affects the poor vis-a-vis the rich. Using a broad cross-sectional sample of nearly 100 countries, both univariate and multivariate tests show that liquidity in a particular country's stock market is negatively related to a country's Gini coefficient. Said differently, liquidity and inequality are negatively correlated. We also find that the share of income earned by those in the top of the income distribution is negatively affected by the level of stock market liquidity. Similarly, we find that the share of income earned by those in the bottom part of the income distribution is positively associated with stock market liquidity. These findings seem to suggest that, indeed, liquidity in financial markets disproportionately affects the income of poor relative to the rich.
We continue to address this research question by determining whether the relationship between liquidity and inequality is simply driven by the most developed countries. Instead we find that the negative relation between stock market liquidity and inequality is found in countries with moderate GDP per capita and, to a lesser extent, countries with the least GDP per capita. For those countries with the highest GDP per capita, we do not find a reliable correlation between liquidity and inequality. In other tests, we find that liquidity is negatively correlated with poverty rates in our sample of countries. Again, these findings support the idea that liquidity has an important effect on the incomes of the poor.
