Financial Architecture and Economic Performance: International Evidence
No 449, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan
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)
New Economics Papers: this item is included in nep-ent and nep-pke
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Journal Article: Financial Architecture and Economic Performance: International Evidence (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:2001-449
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