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onfirmation for earlier theories that postulated that the liquidity provided by stock markets raises the productivity of capital on an economy-wide level because it facilitates longer-term, profitable investment Demirguc and Levine (1996) Atje and Jovanovic (1993), using a data set of 39 countries over the period 1980 – 1988, found that a strong, positive and statistically significant relationship existed between stock markets and economic growth.

In contrast, Harris (1997) using data on 49 countries from the year of 1980 to 1991 and he found that there is no significant relationship between stock market and economic growth concluded that the evidence suggesting that stock markets promote economic development was “at best very weak”. Later, this finding been supported by Azarmi et al. (2005) show a negative relationship between stock market development and economic growth.

On the other hand, Choong et al. (2003) finds on their study using autoregressive distributed lag (ARDL) bounds test and the Granger causality test based on vector error correction model (VECM) to study the finance-led growth hypothesis in Malaysia for the period of 1978 to 2000. They suggest that stock market development posses a noteworthy constructive long run impact on economic growth. In the short run, on the other hand, the stock market is identified as a foremost segment in stipulating domestic growth. They also state that in circumstances where the market is more stable and liberalize as well as there is an improvement in the size and the regulations of the stock market, the evolution of financial sector in particular the stock market has the inclination towards stimulating and promoting economic growth. In other words, the importance of the causal relationship of financial development and economic growth have found in Malaysia.

Ang (2008) examines the mechanism that links financial development and economic growth for Malaysia. Through ARDL, he examines six mechanisms that provide the linkage between financial development and economic growth. These are: financial development, private saving, foreign direct investment, saving-investment correlation, private investment and aggregate output. The results indicate that financial development has a strong linkage with economic growth through qualitative and quantitative channels. It further observes that some of the repressionist policies of the Malaysian government such as interest rate controls and high reserve requirement tend to have positive impact on economic growth. He concludes that government has a critical role to play in promoting effective and sound financial system.

Shahbaz et al. (2008) also investigate whether there is a relationship between stock market development and economic growth in Pakistan by using annual time series data from 1971-2006. They applied ARDL and Juselius-Johansen co-integration testing techniques to estimate the long-run relationship between the two variables. The results reveal a very strong, positive long-run relationship between stock market development measured by market capitalization ratio and economic growth proxied by real per capita income significant at 5% level.

Vazakidis and Adamopoulos (2009) examine the causal relationship between stock market development and economic growth for France for the period 1965 to 2007 using Granger-causality tests based on VECM. The results indicate that economic g