Does economic structure determine financial structure?

Abstract

In this paper, we examine the relationship between the structure of the real economy and a country's financial system. We consider whether the development of the real economic structure can predict the direction of evolution of a country's financial structure. Using data for 108 countries, we find a significant relationship between real economic structure and financial structure. Next, we exploit shocks to the economies in India, Finland and Sweden, and South Korea and show that changes in the economic structure of a country influence the evolution of its financial system. This suggests that financial institutions and capital markets change in response to the structure of industries.

Political origins of financial structure in developing countries

“…First, the variable GDP per capita has a positive and significant coefficient through all the specifications. This result confirms empirical studies that have demonstrated a positive relationship between the level of economic development and the structure of the financial system (Allen et al, 2007; Ergungor 2004; Kwok & Tadesse, 2006). It also corroborates the argument that the more the GDP per capita increases, the more economic agents will seek sophisticated services.…”

“…Following Ergungor (2004) and Allen et al (2007), we retain two variables to measure the structure of the financial system. The first variable measures the size of the financial structure, while the second measures its activity.…”

“…It is therefore appropriate to ask whether some factors are better suited than others in explaining this financial system structure. In this regard, a narrow literature has been interested in studying this relationship (Allen et al, 2007). According to this literature, the predominance of a financing scheme over another is primarily the result of the political preferences.…”

“…GHARDALLOU Moreover, Allen et al (2007) examined the relationship between the structure of the real economy and the financial system. Using the generalized least squares estimator in a sample of 103 countries over the period 1976-2005, they show a significant relationship between the structure of the real economy and the financial sector structure.…”

Factors Affecting Profitability of Pharmaceutical Companies Listed in Indonesia Stock Exchange

“…Capital could come from own capital or loan capital or debt. Therefore, determining an optimal capital structure is also important, especially for go public companies in the capital market (Black & Gilson, 1988;Alti, 2006;Ang et al, 2018;Allen et al, 2018;Roychowdhury & Srinivasan, 2019).…”