This study investigates the relationship between stock market development and economic growth in the Kingdom of Bahrain over the twenty-five year period of 1990 to 2014. Using regression analysis, the study analyzes the relationship between economic growth, measured by GDP growth rate, and stock market indicators, such as size, liquidity, All-Share Index, turnover, and market capitalization. The first major finding is that stock markets indicators have influence on economic growth in Bahrain. The most significant of these variables are All-Share Index, market capitalization, and turnover ratio. This result indicates that stock market development leads to economic growth in Bahrain. Secondly, by investigating the effect of economic growth on stock market development, the study confirms that economic growth, in turn, also leads to development of the stock market. As such, when the relationship between economic growth and stock market development indicators is subjected to analysis, findings show that stock market development indicators explain variation in economic growth rates even at the sector level. These findings have clear policy implications, in that they provide evidence that strengthening the growth and reform of the stock market will help enhance economic growth in the country; therefore, the government should be encouraged to continue its efforts in this respect.
