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The financial environment affects the level of R&D activity of a country. Using the proxy measures of macroeconomic financial environment variables, we show that cross-country differences in R&D activity, including expenditures, researchers, and patents etc., are correlated with the stock market turnover ratio. In particular, we found that the relationship was in direct relation to R&D expenditures or the number of researchers but indirect in relation to R&D outputs such as patents. These results imply that finance structure of an economy could enhance R&D activity through providing efficient resource allocation function. Other proxy measures of the financial environment such as banking sector size or stock market capitalization are not found to be significant. The size of the finance industry does not seem to change the national portfolio toward more high-risk innovative sectors. Financial quality, not size, determines the level of R&D intensity.Keywords: R&D; financial development; stock turnover ratio. * Corresponding author. 381 Rev. Pac. Basin Finan. Mark. Pol. 2010.13:381-401. Downloaded from www.worldscientific.com by UNIVERSITY OF CALIFORNIA @ SAN DIEGO on 08/17/15. For personal use only. 382 • Young-Soon Hwang, Hong-Ghi Min & Seung-Hun Han Rev. Pac. Basin Finan. Mark. Pol. 2010.13:381-401. Downloaded from www.worldscientific.com by UNIVERSITY OF CALIFORNIA @ SAN DIEGO on 08/17/15. For personal use only.

We investigate if Subordinated Note and Debenture (SND) holders make banks to take less risk by analyzing balance sheet data of Japanese commercial banks. The cross-section regression shows that banks take less risk as the amount of SNDs increase. Specifically, it is shown that the loan risk measure (the ratio of impaired loans to the total loans) and the stock investment risk measure (the invested stocks over bank capital) have decreased with the increase of SND amounts. These results provide evidence that SNDs are effective instrument for the market discipline.

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