Political origins of financial structure in developing countries

Abstract

AbstractThe structure of the financial system refers to the way funding is shared between banks and financial markets. This paper investigates the determinants of the financial structure variability across emerging economies. It particularly seeks to study the effects of democratic versus autocratic political regimes on the financial system structure. The results provide evidence that democracy is associated with higher market‐based financial systems. In this line, democracy tends to promote financial systems where stock markets are more active and efficient than banks. Therefore, policymakers are recommended to strengthen democratic institutions through reinforcing political rights and civil liberties, as part of a strategy of stock markets development.