Impact of Institutional Quality on Financial Development: Cross-Country Evidence based on Emerging and Growth-Leading Economies

Muhammad Asif Khan, Dongmin Kong, Junyi Xiang and Jian Zhang

Emerging Markets Finance and Trade, 2020, vol. 56, issue 15, 3829-3845

Abstract: This study investigates the impact of institutional quality (IQ) on the financial development (FD) of 15 emerging and growth-leading economies (EAGLEs). We show that an institutional framework can efficiently handle ethnic fragmentation (ETHF) and can be a source of enhanced FD. The 2SLS results obtained by using ETHF as an instrument of IQ are highly consistent. We also perform three cross-sectional tests and find that openness, national culture, and economic growth significantly moderate FD through their positive interaction with IQ. Our results are robust across two measures of IQ and alternative estimation techniques as well as shed light on the crucial role of institutions in driving the FD of EAGLEs.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:56:y:2020:i:15:p:3829-3845

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DOI: 10.1080/1540496X.2019.1588725

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