Financial liberalization became a key economic policy which was implemented by many emerging countries during the 1980s and 1990s. Nevertheless, the academic critiques argue that it could render domestic stock markets highly volatile and economies susceptible to economic turmoil due to the irrational and pro-cyclical nature of international capital flows, and the characteristics of the emerging markets such as market imperfections, information asymmetry, and lack of sound financial infrastructure. The studies generally conducted during the 1990s and early 2000s suggest that being small in size, less liquid, less efficient, highly volatile, and having poor quality of legal environment and governance were common characteristics of the stock markets in the emerging Islamic countries (henceforth, EIC). Supporting this view, a divergence in the performance of stock market development and economic growth appears between EIC and emerging non-Islamic countries (henceforth, ENIC) since the 1990s, in favor of the latter. The limited and relatively dated literature studying the effect of financial liberalization, which is a broader approach, generally suggests that EIC could not derive benefits to the extent that is expected by the main stream. In this regard, Is stock market liberalization (henceforth, SML) a detrimental or beneficial factor for the stock market development and economic growth in EIC in the long run? becomes the problem statement of the study. In order to address the problem statement, the dissertation examines the effect of SML on the stock market volatility, cost of capital, stock market development, and finally economic growth in both EIC and ENIC in a comparative approach. Overall, the study results drived from linear models, i.e. static panel techniques, and non-linear models, i.e. ARCH and its variants, suggest that SML reduces the cost of capital, contributes on the stock market development and economic growth in both EIC and ENIC; and the effects are stronger, at least in magnitude, in EIC. It is suggested that financial liberalization is expected to improve the financial infrastructure by forcing the local authorities to implement necessary reforms in order to eliminate the market deficiencies and improve the standards of financial system. The reformation implemented during the late 1990s and early 2000s along with the policies to liberalize domestic capital markets is the main ground behind the study results.