Financial system structure and economic growth: Structure matters

Investment Decisions, Price-Earnings Ratios and Finance: Evidence from Firm-Level Data

“…Finally, an additional and innovative finding of this paper with respect to the existing literature (Beck and Levine, 2002;Demirguc-Kunt and Maksimovic, 2002;Ndikumana, 2005) is that it shows one channel through which the structure of the financial system has an independent effect on growth in the sense that it enhances the response of firm's investment to the relative importance of financial markets over banks, in a model that accounts for financial development and for other determinants of investment. This result is consistent with the finding of Ergungor (2008) showing that the market-based financial systems are more likely to promote growth than the bank-based systems.…”

“…At the country level, Ndikumana (2005) also provides evidence that it is the overall degree of financial development that matters for aggregate investment, not the financial structure. In contrast, Ergungor (2008) empirically suggests that, in inflexible judicial environments, countries will experience higher growth rates if they have well-developed banking systems because relationship are essential for reputation building.…”

“…Nevertheless, the results provided in the present contribution are consistent with some recent theoretical and empirical literature. From an empirical point of view, the relative importance of market-based systems over bank-based systems has been documented by a recent work by Ergungor (2008) who shows that market-based systems promote growth compared with bank-based systems in countries with flexible legal systems. Table 5.…”

“…Moreover, two natural questions about the impact of financial institutions on investment have been addressed in the finance and growth literature. The first question is whether more efficient financial systems are likely to encourage investment decisions (Wurgler, 2000;Love, 2003;Ndikumana, 2005;Bekaert et al, 2007), while the second question is whether the financial specialization of a country toward the stock market or the banking activity plays a key role in investment decisions (DemirgucKunt and Maksimovic, 2002;Ndikumana, 2005;Ergungor, 2008).…”

“…Moreover, two natural questions about the impact of financial institutions on investment have been addressed in the finance and growth literature. The first question is whether more efficient financial systems are likely to encourage investment decisions (Wurgler, 2000;Love, 2003;Ndikumana, 2005;Bekaert et al, 2007), while the second question is whether the financial specialization of a country toward the stock market or the banking activity plays a key role in investment decisions (DemirgucKunt and Maksimovic, 2002;Ndikumana, 2005;Ergungor, 2008).Even though the literature on corporate finance has focused on different price-based measures of firms' growth opportunities, such as the Tobin's Q, there is no evidence on the sensitivity of investment to the price-earnings ratios. On the other hand, the literature on finance and growth documents the existence of a positive influence going from growth opportunities to investment and therefore, to growth, but only using aggregate industrylevel and country-level data.…”