Can Corporate Financing Through the Stock Market Create Systemic Risk? Evidence from the BRVM Securities Market

This paper aims to analyse the systemic risk in the regional BRVM (Bourse Régionale des Valeurs Mobilières) stock exchange in West Africa. This stock market, shared by 8 francophone West Africa countries, has grown over the last decade and is now a valuable source of funding of corporates and governments. This paper seeks to examine the extent to which growing activities in this market generates systemic risk. We cover six economic sectors, namely distribution, finance, industry, agriculture, utility, and transportation. We find strong linkages across all six sectors, but financial and industrial sectors can be seen as the centre of the system around which the other sectors rotate. Financial firms are not the only source of systemic risk in the WAMEU regional stock market, even though they play an important role in the system. Finally, using panel regressions, we find that big firms and high value companies contribute more to systemic risk. In contrast, high level of debt is associated with low systemic risk. Moreover, apart from the agriculture sector in which financial distress risk is negatively correlated with systemic risk, we find opposite results for firms in other sectors. Overall, we find that the determinants of systemic risk depend on the indicator used to assess systemic risk and the sectors in which companies operate. Therefore, the WAEMU financial system is not one-size-fits-all system.