Market-based Financial Development Research Articles

Does financial development has (a)symmetric effect on environmental quality: insights from South Africa

PurposeThis paper investigates the (a)symmetric effects of financial development in the presence of economic growth, energy consumption, urbanization and foreign direct investment on environmental quality of South Africa between 1980 and 2017.Design/methodology/approachA robust measure of financial development is generated using banking institutions and non-banking institutions market-based financial development indicators, while environmental quality is measured using carbon footprint, non-carbon footprint and ecological footprint. The objectives of the study are captured using linear and non-linear autoregressive distributed lag.FindingsThe result from the symmetric analysis suggests that financial development stimulates carbon footprint and ecological footprint in the short run; however, financial development abates non-carbon footprint. In the long run, financial development has a significant negative effect on carbon footprint and ecological footprint. However, the asymmetric analysis established strong asymmetric effect in the short run, while no asymmetric effect is found in the long run. The short run asymmetric analysis reveals that positive shock in financial development increases carbon footprint and ecological footprint; however, positive changes in financial development reduce non-carbon footprint. Negative shocks in financial development, on the other hand, have a positive impact carbon footprint, non-carbon footprint and ecological footprint.Practical implicationsThe study's outcome implies that the concept of “more finance, more growth” could also be applied to “more finance, better environment” in South Africa. The study offers vital policy suggestions for the realization of sustainable development in South Africa.Originality/valueThis empiric adds to the body of knowledge on the influence of financial development on various components of environmental quality (carbon footprint, non-carbon footprint and ecological footprint) in South Africa.

DOES TOURISM INFLUENCE FINANCIAL DEVELOPMENT IN KENYA?

Objective: In this study, we investigate the impact of tourism on financial development in Kenya using time series data from 1995 to 2017. The study uses the autoregressive distributed lag (ARDL) bound testing approach to cointegration and error correction model to examine this connection. To increase the robustness of the results, the study uses two proxies of financial development, namely broad money (bank-based financial development proxy) and total value of stocks traded (market-based financial development proxy). Results show that tourism has an insignificant impact on financial development in Kenya – both in the short run and in the long run. The results are relevant regardless of whether the financial development is proxied by a bank-based financial development indicator or by a market-based financial development indicator. This finding points to the fact that, although tourism is one of the main sources of foreign exchange in Kenya, it has no direct impact on financial development. The findings from this study add value to policy makers in Kenya by revealing the insignificant impact that tourism has on financial development, although this is in contrast to other studies that found a positive contribution. Based on the findings, Kenya may not anchor its financial development policies on tourism.

Does financial development matter for domestic investment? Empirical evidence from India

PurposeThis paper empirically examines the impact of financial development on domestic investment in India for the period 1989–2017.Design/methodology/approachThis study employs the autoregressive distributed lag (ARDL) bounds testing approach to co-integration to test the long-run relationship between financial development and domestic investment. To test the direction of causality, Toda–Yamamoto causality test and vector error correction model (VECM) Granger causality/Block Exogeneity Wald test have been employed. Investment has been measured by Gross Capital Formation. To capture various aspects of financial development in India, eight alternative indicators (both bank based and market based) have been used. With the help selected indicators, a composite index (FINDEX) of financial development has been constructed using principal component analysis (PCA).FindingsThe estimated result finds evidence in favour of positive, short-run and long-run impact of financial development on investment in the Indian economy. Both bank-based and market-based indicators are found to significantly affect the level of investment. The significant effect of efficiency-based financial development indicators (both bank based and market based) upon domestic investment implies that there is a need to implement policies that ensure the efficiency of financial intermediation.Originality/valueTo the best of authors' knowledge, not much research has been done to explore the relationship between financial development and domestic investment, especially in the case of Indian economy. This study also tries to find the impact of bank-based and market-based financial development indicators upon domestic investment to explore banks vs market issue.

Impact of financial structure on environmental quality: evidence from panel and disaggregated data

ABSTRACTThis paper examines two unresolved issues regarding the nexus between financial system development and environmental quality. (i) Does the structure of the financial system matter? (ii) Is there a nonlinear relationship? We employ the newly developed dynamic common correlated effect (CCE) and the dynamic panel generalized method of moments (GMM) estimators in order to address potential endogeneity, heterogeneity and cross-sectional dependence in a panel of 58 countries. The panel data analysis reveals that the structure of the financial system matters in safeguarding environmental quality. More precisely, bank-based financial development enhances environmental quality, whereas the impact of market-based financial development is tenuous. We find some evidences of a nonlinear relationship between financial system development and environmental quality. The disaggregated data reveals the countries where financial structure matters for environmental quality, and countries where a nonlinear relationship exists between the variables. Therefore, countries that want to maintain environmental quality should strengthen the development of bank-based financial system. Moreover, effort to develop and reposition the stock markets should be prioritized in countries’ environmental policies with a view to sustaining environmental quality.

The Role of Bank-based and Market-based Financial Development on Economic Growth of Nepal

This study examines the empirical relationship between economic growth and various measures of stock market and banking development in Nepal over the sample period 1987/88 to 2015/16 using a framework of endogenous growth model suggested by Romer (1986), Rebelo (1991) and Pagano (1993). The study finds that stock market size, liquidity and banking development measures predict the economic growth in the context of Nepal. Similarly, the study results show the important role of banking development on economic growth process of Nepal because all indicators of banking development have positive and significant impact on growth. The study results shed light on the fact that both the level of stock market development and the level of banking development can influence the economic growth of Nepal. This finding supports the notion of Levine (1996) which articulates that stock market and banking sector are independently as well as jointly significant in promoting economic growth.  

Bank-based and market-based development and economic growth: an international investigation

PurposeThe purpose of this paper is to investigate the relative impact of bank-based and market-based financial developments on economic growth from 1984 to 2015, using 60countries.Design/methodology/approachThis study uses fixed effect and generalized method of moments (GMM) to investigate the relative impact of bank-based and market-based financial developments on economic growth from 1984 to 2015, using 60 countries. The study further controls regional effects and the Asian crisis, as well as the global economic crisis.FindingsThe empirical results of the study revealed that market-based development positively affects economic growth. Besides, market-based financial development indirectly promotes investment, which has the potential to strongly enhance growth. The findings of this study, therefore, provide more support to pro-market-based financial development policies in these regions. Interestingly, bank-based development has no direct impact on development, but indirectly encourages investment, which also promotes growth.Originality/valueThis paper is the first of its kind to empirically examine fixed effect and GMM to investigate the relative impact of bank-based and market-based financial developments on economic growth from 1984 to 2015, using 60 countries.

Empirics on influencing mechanisms among energy, finance, trade, environment, and economic growth: a heterogeneous dynamic panel data analysis of China.

The current study empirically examines the influencing mechanisms among energy consumption, financial development, international trade, environment, and economic growth for 29 Chinese provinces and cities for periods 1997 to 2016. A new augmented growth model has been developed, introducing financial development as a shift factor of aggregate production, international trade as determinant of total factor productivity, and energy consumption as input of production function. The key empirical findings include (1) financial development exposed dual nature in terms of its influence on energy consumption and carbon emissions. Banking-based financial development is revealed to add in energy consumption and carbon emissions, while stock market-based financial development curtailed energy consumption and mitigated the carbon emissions, improving the environmental quality, (2) GDP growth is uncovered to add to international trade with varying magnitudes in all samples; however international trade imparted negative to neutral to positive influence on GDP growth in W-region, C-region, and E-region, respectively. It is named as competitiveness driven growth deceleration/neutrality/acceleration influence. It states that as regions/countries develop, the domestic industry gets competitive in international trade markets; consequently, the influence of international trade on economic growth transforms from negative to neutral to positive, (3) both type of financial development measures imparted significant positive influence on GDP growth which confirms the Schumpeterian view to be valid in regional China, (4) based on causality from quadratic terms of GDP, international trade, and financial development ratio to carbon emissions growth confirm the existence of conventional EKC as well as international trade and financial development based EKC in all regions except W-region for which conventional EKC and international trade based EKC are not confirmed. Finally, based on empirical influencing mechanisms, the relevant policies are recommended.

Do financial systems spur economic growth in the USA? An empirical investigation

In this paper, we use the autoregressive distributed lag (ARDL) bounds testing approach to examine the dynamic impact of both bank-based financial development and market-based financial development on economic growth in the United States of America (USA) during the period 1980 to 2012. In order to adequately capture the depth and width of the USA?s financial system, we used both bank-based and marketbased financial development indices as proxies for bank-based and market-based financial systems. These indices were constructed from a number of bank- and market-based financial development indicators, using the method of means-removed average. Our empirical results reveal that both bank-based and market-based financial development have a positive impact on economic growth in the USA. These results apply irrespective of whether the regression analysis is conducted in the long run or in the short run. We, therefore, recommend that both pro-bank-based and pro-market-based financial sector development policies should be pursued in the USA - in order to bolster real sector growth and economic development.

The Impact of Financial Development on Investment: a Review of International Literature

This article summarises the empirical literature on the impact of financial development on investment. It presents a topical analysis of empirical research that focuses mainly on the interaction between financial development and investment, determinants and measurement of both financial development and investment, and empirical findings on the relationship between the two variables under discussion. The study concludes that most of the research done on the relationship between financial development and investment is highly skewed towards assessing the relationship using mostly bank-based financial development indicators, as compared to the market-based financial development indicators. Given the number of studies assessed, the impact of financial development on investment appears to be inconclusive, at best. Moreover, the study shows that the relationship between these two macroeconomic variables seems to differ from country to country; it is dependent on the proxies used to measure the level of financial development, as well as the methodology employed.

The Impact of Financial Development on Investment: A Review of International Literature

[full article and abstract in English]
 This article summarises the empirical literature on the impact of financial development on investment. It presents a topical analysis of empirical research that focuses mainly on the interaction between financial development and investment, determinants and measurement of both financial development and investment, and empirical findings on the relationship between the two variables under discussion. The study concludes that most of the research done on the relationship between financial development and investment is highly skewed towards assessing the relationship using mostly bank-based financial development indicators, as compared to the market-based financial development indicators. Given the number of studies assessed, the impact of financial development on investment appears to be inconclusive, at best. Moreover, the study shows that the relationship between these two macroeconomic variables seems to differ from country to country; it is dependent on the proxies used to measure the level of financial development, as well as the methodology employed.

Financial Development and Investment in Botswana: A Multivariate Causality Test

Abstract This paper examines the causal relationship between financial development and investment in Botswana between 1976 and 2014. The autoregressive distributed-lag (ARDL) bounds testing approach and a trivariate Granger-causality model are employed. In order to capture the breadth and depth of the financial sector in the study country, both bank- and market-based financial development indices are used. The results show that there is a bidirectional Granger-causal relationship between both bank-based and market-based financial development and investment in the short run. In the long run, a distinct causal flow is found to prevail only from investment to bank-based financial development. Given the findings, the causal relationship between financial development and investment is not a given as implied in economic literature. For Botswana, policies that enhance both investment and market-based financial development should be employed in the short run.

Finance-Growth Nexus Revisited: Empirical Evidence from Six Countries

Abstract This paper investigates the dynamic causal relationship between bank-based financial development and economic growth, and between market-based financial development and economic growth in six countries during the period from 1980 to 2012. The causal relationship was found to vary largely across countries and over time. In general, bank-based financial development seems to Granger-cause economic growth in the UK and only in the long run in Australia. However, there is a feedback loop in Brazil and Australia, but only in the short run for the latter. In Kenya, South Africa and USA, the results support the neutrality hypothesis. The study results further indicate short-run unidirectional causality from market-based financial development to economic growth in the USA. Evidence of the feedback loop was found in Kenya, while the demand-following hypothesis found support only in South Africa and Brazil. However, the neutrality view was supported in Australia and the UK.

Financial Innovation, Stock Market Development, and Economic Growth: An Application of ARDL Model

This study aims to explore the relationship between economic growth, financial innovation, and stock market development of Bangladesh for the period 1980–2016. To investigate long-run cointegration, this study used the autoregressive distributed lagged (ARDL) bounds testing approach. In addition, the Granger-causality test is used to identify directional causality between research variables under the error correction term. Study findings from the ARDL bound testing approach confirm the existence of a long-run association between financial innovation, stock market development, and economic growth. Furthermore, the findings from the Granger-causality test support bidirectional causality between financial innovation, economic growth and stock market development, and economic growth both in the long run and short run. These findings support the theory that market-based financial development and financial innovation in the financial system can spur economic development.

South Africa’s Financial Development and its Role in Investment

Abstract This study investigates the impact of financial development on investment in South Africa between 1976 and 2014. The model estimated is based on the flexible accelerator investment model. Composite indices for bank-based and market-based financial development indicators are used as explanatory variables. The estimated model postulates that both bank-based financial development and market-based financial development have an acceleratorenhancing effect on investment. Results show that market-based financial development has a positive impact on investment in the long run, while bank-based financial development has a negative effect in the short run. Implications are that, for South Africa, market-based financial development has a positive accelerator-enhancing effect on investment in the long run. In contrast, bank-based financial development is found to have a negative accelerator enhancing effect on investment in the short run.

Does Stock Market-Based Financial Development Promotes Economic Growth in Emerging Markets? New Evidence from Nigeria

Does Stock Market-Based Financial Development Promotes Economic Growth in Emerging Markets? New Evidence from Nigeria

Financial Development, Savings and Investment in South Africa: A Dynamic Causality Test

This study investigates the causal relationship between financial development and investment in South Africa during the period from 1976 to 2014. The study incorporates both bank-based and market-based segments of financial sector development. In addition, composite indices for bank-based and market-based financial development indicators are used as explanatory variables. The study incorporates savings as an intermittent variable – thereby creating a simple trivariate Granger-causality model. Using the ARDL bounds testing approach to cointegration and the ECM-based Granger-causality test, the study finds a unidirectional causal flow from investment to financial development, but only in the short run. In the long run, the study fails to find any causal relationship between financial development and investment. These results apply irrespective of whether bank-based or market-based financial development is used as a proxy for financial sector development. The findings of this study have important policy implications.

Bank Versus Stock Market Development in Brazil: An ARDL Bounds Testing Approach

Abstract This paper examines the impact of both bank-based and market-based financial development on economic growth in Brazil during the period from 1980 to 2012. To incorporate all of the aspects of financial development into the regression analysis, the study employs a method of means-removed average to construct both bank-based and market-based financial development indices. Based on the ARDL approach, the empirical results show that there is a positive relationship between market-based financial development and economic growth in Brazil in the long run, but not in the short run. The results also show that bank-based financial development in Brazil does not have a positive effect on economic growth. This applies irrespective of whether the regression analysis is conducted in the short run, or in the long run. The study, therefore, concludes that it is the stock market, rather than banking sector development, that drives long-run economic growth in Brazil.

Are Banks and Stock Markets Complements Or Substitutes? Empirical Evidence from Three Countries

This paper has tested whether bank-based financial development and market-based financial development are complements of, or substitutes for, one another in enhancing economic growth in the USA, Brazil and Kenya during the period from 1980 to 2012. These three countries represent a modest cross-section of the general financial structure prevalent in many developed and developing countries. Unlike some of the previous studies, the study employs the newly developed ardl-Bounds-testing approach to carry out the test. The study also employs the method of means-removed average to construct both bank-based and market-based financial development indices. The results of this study show that while in the USA and Brazil, bank-based and market-based financial systems complement each other in enhancing economic growth; in Kenya, the two financial systems seem to be substitutes rather than complements.

Financial development and environmental quality: The way forward

The present paper re-examines the asymmetric impact of financial development on environmental quality in Pakistan for the period 1985Q1 to 2014Q4. A comprehensive index of financial development is generated using Bank- and Stock market-based financial development indicators. The results show that inefficient use of energy adversely affects the environmental quality. This suggests adoption of energy efficient technology at both production and consumption levels. These technologies would be helpful to improve environmental quality, enhance the productivity in long-run and save energy. Bank-based financial development also impedes the environment. The government should encourage lenders to ease the funding for energy sector and allocate financial resources for environment friendly businesses rather than wasting them in consumer financing.

Banks, Stock Market Development and Economic Growth in Kenya: An Empirical Investigation

ABSTRACTIn this paper, we have examined the impact of both bank- and market-based financial development on economic growth in Kenya during the period 1980 to 2012, using the autoregressive distributed lag bounds testing approach. To capture as far as possible the breadth and depth of the Kenyan bank- and market-based financial systems, the study employs the method of means-removed average to construct both bank- and market-based financial development indices from an array of banking sector and stock market variables. The empirical results of this study show that market-based financial development has a positive impact on economic growth in Kenya. However, the results have also shown that bank-based financial development has no impact on economic growth in the study country. These results apply irrespective of whether the regression analysis is conducted in the long run or in the short run. The findings of this study, therefore, lend more support to pro-market-based financial development policies in Kenya.