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Financial Architecture and Economic Performance: International Evidence

Solomon Tadesse

No 449, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: The paper examines the relations between the architecture of an economy's financial system - its degree of market orientation - and economic performance in the real sector. We argue that the relative effectiveness of bank-based versus market-based financial systems depends on the strength of the contractual environment and the extent of agency problems in the economy. We find that while market-based systems outperform bank-based systems among countries with developed financial sectors, bank-based systems fare better among countries with underdeveloped financial sectors. Countries dominated by small firms grow faster in bank-based systems and those dominated by larger firms in market-based systems. The findings suggest that recent trends in financial development policies that indiscriminately prescribe market-oriented financial-system-architecture to emerging and transition economies might be misguided because suitable financial architecture, in and of itself, could be a source of value.

Keywords: Banking and Finance; Corporate Governance (search for similar items in EconPapers)
JEL-codes: G1 G21 O1 O4 (search for similar items in EconPapers)
Pages: pages
Date: 2001-08-01
New Economics Papers: this item is included in nep-ent and nep-pke
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http://deepblue.lib.umich.edu/bitstream/2027.42/39833/3/wp449.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:2001-449

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