How Innovation Shapes Financial Structure: The Moderating Role of Institutional Quality

Yimin Wu and Tomoo Kikuchi

Papers from arXiv.org

Abstract: This paper studies how the stock market---relative to the banking sector---responds to innovation by using a panel of 75 countries from 1982 to 2021. Our baseline result is that innovation has a positive effect on stock market activity, efficiency and size relative to the banking sector. In addition, we uncover alternative funding channels by studying how institutional quality moderates the effect of innovation on financial structure. While the moderating effect is positive for activity and efficiency, it is negative for size, suggesting a larger role of banks under high institutional quality. Furthermore, the moderating effect can be nonlinear for efficiency, suggesting alternative efficient funding channels under low institutional quality.

Date: 2025-12, Revised 2026-08
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