Justice and finance: Does judicial efficiency contribute to financial system efficiency?

Abstract

Efficient financial systems play a crucial role in promoting economic growth and development. This study explores the impact of judicial efficiency (JE) on financial system efficiency (FSE) and its components, financial institutions efficiency (FIE) and financial markets efficiency (FME), across 108 countries over the period from 2004 to 2020. Utilizing a fixed effect regression for our baseline analysis and a two-stage least squares (2SLS) regression to address endogeneity, we find robust evidence that JE has a positive and significant effect on FSE and its components, FIE and FME. Moreover, we find that JE's positive impact on FSE and its components holds across different levels of per capita income, including high-income, low-income, and emerging market economies. Our findings, which are confirmed by several robustness checks, highlight the universal importance of a well-functioning, efficient judicial system in driving FSE regardless of a country's economic context. The results show that countries should prioritize reforms to strengthen judicial institutions and enhance efficient contract enforcement. An efficient legal framework and judicial process are conducive to creating an environment in which an efficient financial system can develop, paving the way for sustainable economic growth.