Legal institutions, democracy and financial sector development

Abstract

Conventional wisdom suggests that institutional development is a precursor to financial sector development. Using a panel of 122 countries over the period 1970–2000, we find that while there is a correlation between the quality of legal institutions and financial development, the relationship is not causal. Changes in the quality of legal institutions do not predict changes in the level of financial development. The results suggest that legal institutions and the financial sector develop simultaneously and are jointly determined by unobservable country-specific factors.

Citation

Miletkov, M. and Babajide Wintoki, M. (2009), "Legal institutions, democracy and financial sector development", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Corporate Governance and Firm Performance (Advances in Financial Economics, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 171-196. https://doi.org/10.1108/S1569-3732(2009)0000013009