Financial Development and Capital Allocation Efficiency Nexus: Do Sources and Dimensions of Financial Development Matter?

Ibrahim Yagli () and Emin Huseyin Cetenak
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Ibrahim Yagli: Nevşehir Hacı Bektaş Veli University, Turkey
Emin Huseyin Cetenak: Nevşehir Hacı Bektaş Veli University, Turkey

Journal of Economic Development, 2023, vol. 48, issue 2, 83-103

Abstract: The study aims to investigate the impact of financial development on capital allocation efficiency and determine its significance in this effect, considering sources and dimensions. A high capital expenditure in response to growth potential, as shown by the increase in value-added, is required for effective capital allocation. This study examines 50 countries with at least 25 years of data, between 1980-2016. Calculating the parameters that show capital allocation efficiency is the first step in the analysis. The impact of financial development on the effectiveness of capital allocation is examined in the second stage. The findings indicate that development of financial institutions contribute significantly to the capital allocation process. Moreover, up until a certain point, the depth of the financial system makes the most contribution to effective capital allocation; however, after that point, the contribution stops, and changes in this dimension have a negative impact on allocation efficiency.

Keywords: Capital Allocation; Investment; Financial Development (search for similar items in EconPapers)
JEL-codes: D61 G10 O14 (search for similar items in EconPapers)
Date: 2023
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