International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2018, 8(2), 357-369. International Journal of Economics and Financial Issues | Vol 8 • Issue 2 • 2018 357 The Causal Effect of Stock Market Development, Financial Sector Reforms and Economic Growth: The Application of Vector Autoregressive and Error Correction Model Charles O. Manasseh 1 *, Jonathan E. Ogbuabor 2 , Charles N. Anumudu 3 , Felicia C. Abada 4 , Martins A. Okolie 5 and Okoro E. Okoro 6 1 Department of Economics, Coal City University Enugu, Nigeria. 2 Department of Economics, University of Nigeria Nsukka, Nigeria. 3 Department of Economics, Michael Okpara University, Umudike Umuahia, Nigeria. 4 Social Science Unit, School of General Studies, University of Nigeria Nsukka, Nigeria. 5 Department of Business Administration, Coal City University Enugu, Nigeria. 6 Department of Banking & Finance, University of Nigeria, Enugu Campus, Nigeria. *Email: charssille@gmail.com ABSTRACT The study examined the causal relationship between stock market development, fnancial sector reform and economic growth in Nigeria, using Vector autoregressive and error correction model for the analysis. We observed bidirectional causality between stock market development and economic growth, along with fnancial sector reform and economic growth. This implies that stock market development and economic growth and; fnancial sector development and economic growth promote each other. More so, the fndings reveal a unidirectional causality running from fnancial sector reform to stock market development. Hence, there is an evidence of positive long-run relationship between the variables of cointegrating equations. Furthermore, more inquiries on the relationship between business environment, legal framework and stock market development, show a positive long run relationship between the variables of the cointegrating vectors, suggesting that good business environment and quality legal framework could be a prerequisite for stock market development through confdence building and investors protection. Keywords: Economic Growth, Stock Market Development, Financial Sector Reform JEL Classifcations: G10, EO2, E44 1. INTRODUCTION It is a clear fact that an organized, developed and effcient stock markets increases domestic savings, and also provide individuals and corporate investors with an additional fnancial instrument which stimulate the quality of transactions, investments and economic growth of a country. There is no doubt that development of every economy is partly dependent on the development to fts fnancial sector, and apparently the stockmarket in particular. The acceleration of high level of confdence amongst market players or investors, as the off sprin of market development, to a greater extent, provides opportunities for domestic savings mobilization and allocation from surplus spending units and diversifcation of risk associated with investment portfolios, reducing the crunch of over dependency of frms, government and corporate bodies on banks funding vis-à-vis causing increase in business activities, through the increase in stock market indicators such as, number of companies listed, volume and values of shares traded alongside the overall market capitalization. The role of financial sector reforms in strengthening the development of stock market is insurmountable. This is mostly aimed at consolidating macroeconomic stability and property right of the investors or shareholders, creating a friendly and competitive business environment for increase business activities to improve fnancial soundness and stock markets, thus, integrating domestic fnancial system into world fnancial market (De la Torre et al., 2007 and Jbili et al., 1997). However, this suggests that the pursuit of reforms geared towards rapid development of stock market and fnancial market in general, would enable private and