Financial Structure and Economic Development : Firm, Industry, and Country Evidence

The authors explore the relationship between financial structure - the degree to which a financial system is market- or bank-based - and economic development. They use three methodologies: 1) The cross-country approach uses cross-country data to assess whether economies grow faster with market- or bank-based systems. 2) The industry approach uses a country-industry panel to assess whether industries that depend heavily on external financing grow faster in market- or ban-based financial systems, and whether financial structure influences the rate at which new firms are created. 3) The firm-level approach uses firm-level data across a broad selection of countries to test whether firms are more likely to grow beyond the rate predicted by internal resources, and short-term borrowings in market- or bank-based financial systems. The cross-country regressions, the industry panel estimations, and the firm-level analyses, provide remarkably consistent conclusions: a) Financial structure is not an analytically useful way to distinguish financial systems. b) Financial structure does not help us understand economic growth, industrial performance, or firm expansion. c) The results are inconsistent with both market-based and bank-based views. In other words, economies do not grow faster, industries dependent on external financing do not expand faster, new firms are not created more easily, firms' access to external finance is not greater, and, firms do not grow faster in either market- or bank-based financial systems. The authors find overwhelming evidence that the overall level of financial development, and the legal environment in which financial intermediaries, and markets operate, critically influence economic development.

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Bibliographic Details
Main Authors: Levine, Ross, Beck, Thorsten, Maksimovic, Vojislav, Demirguc-Kunt, Asli
Language:English
en_US
Published: World Bank, Washington, DC 2000-08
Subjects:ACCOUNTING STANDARDS, ACCOUNTING SYSTEMS, ANNUAL GROWTH, ANNUAL GROWTH RATE, AVERAGE DATA, BANK CREDIT, BANKING SECTOR, BANKING SYSTEM, BANKS, BLACK MARKET, BLACK MARKET PREMIUM, BUREAUCRATIC EFFICIENCY, CAPITAL ACCUMULATION, CAPITALIZATION, CIVIL LAW, COMMON LAW, CONTRACT ENFORCEMENT, CORPORATE PROFITS, CORRUPTION, COUNTRY CHARACTERISTICS, COUNTRY COMPARISONS, COUNTRY DATA, COUNTRY LEVEL, COUNTRY REGRESSIONS, CROSS-COUNTRY EVIDENCE, CROSS-COUNTRY SAMPLE, DESCRIPTIVE STATISTICS, DEVELOPMENT INDICATORS, DEVELOPMENT RESEARCH, DIVERSIFICATION, ECONOMIC ACTIVITY, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC PERFORMANCE, ECONOMIC THEORY, ERROR TERM, ERROR TERMS, EXPLANATORY VARIABLES, EXPORTS, FINANCIAL DEVELOPMENT, FINANCIAL SECTOR, FINANCIAL SECTORS, FINANCIAL SERVICES, FINANCIAL STRUCTURE, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, GDP, GROWTH DETERMINANTS, GROWTH RATE, GROWTH RATES, GROWTH REGRESSION, GROWTH REGRESSIONS, INCOME, INCOME COUNTRIES, INEFFICIENCY, INFLATION, INFLATION RATE, LARGE SHAREHOLDERS, LAWS, LEGAL ORIGIN, LEGAL PROTECTION, LEGAL SYSTEM, LEGAL SYSTEMS, LIBERTIES, LIQUIDATION, LIQUIDITY, LONG-RUN GROWTH, MACROECONOMIC STABILITY, MARKET CAPITALIZATION, NATIONAL OUTPUT, 0 HYPOTHESIS, OVERHEAD COSTS, POLICY MAKERS, POLICY RESEARCH, PRIVATE SECTOR, PRODUCTIVITY, PRODUCTIVITY GROWTH, REORGANIZATION, RESOURCE ALLOCATION, REVERSE CAUSALITY, RISK MANAGEMENT, RULE OF LAW, SAVINGS, SAVINGS RATES, SHAREHOLDERS, STOCK PRICES,
Online Access:http://documents.worldbank.org/curated/en/2000/08/693232/financial-structure-economic-development-firm-industry-country-evidence
https://hdl.handle.net/10986/19809
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Summary:The authors explore the relationship between financial structure - the degree to which a financial system is market- or bank-based - and economic development. They use three methodologies: 1) The cross-country approach uses cross-country data to assess whether economies grow faster with market- or bank-based systems. 2) The industry approach uses a country-industry panel to assess whether industries that depend heavily on external financing grow faster in market- or ban-based financial systems, and whether financial structure influences the rate at which new firms are created. 3) The firm-level approach uses firm-level data across a broad selection of countries to test whether firms are more likely to grow beyond the rate predicted by internal resources, and short-term borrowings in market- or bank-based financial systems. The cross-country regressions, the industry panel estimations, and the firm-level analyses, provide remarkably consistent conclusions: a) Financial structure is not an analytically useful way to distinguish financial systems. b) Financial structure does not help us understand economic growth, industrial performance, or firm expansion. c) The results are inconsistent with both market-based and bank-based views. In other words, economies do not grow faster, industries dependent on external financing do not expand faster, new firms are not created more easily, firms' access to external finance is not greater, and, firms do not grow faster in either market- or bank-based financial systems. The authors find overwhelming evidence that the overall level of financial development, and the legal environment in which financial intermediaries, and markets operate, critically influence economic development.