Financial Development And Economic Performance (pp. 1-43)
Authors: Tadesse, Solomon (The University of South Carolina)
Abstract: This paper examines the relations between financial development and economic performance, with a focus on the mechanisms through which financial development could influence productivity growth. The financial system of a country has the twin functions of mobilizing capital and facilitating good governance through information production and monitoring. We argue that these twin roles have distinguishable impacts on real economic performance, particularly on productivity improvements. While capital mobilization enable firms to acquire new technologies, thereby allowing faster rates of technological progress, the information and monitoring services induce firms to utilize resources more efficiently. Based on data on a large cross-section of countries, we report strong positive relation between financial development productivity growth, with measures of capital mobilization closely related with technological advancement, and information processing with efficiency gains. The evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision. In so doing, we attempt to shed light on the recurrent policy discussions on financial markets and institutions which traditionally focus solely on their capital mobilization role, and document the empirical content of the information and monitoring role of financial markets which pervade the corporate finance literature.