Impact of FinTech on capital allocation: Empirical evidence from Jordan and Palestine

Abstract

The explosive growth of financial technology (Fintech) has transformed the credit and equity markets, providing small businesses with unprecedented access to capital and driving financial inclusion. However, how this financial inclusion affects the effectiveness of capital allocation remains unclear. Addressing this question, this study examines the impact of Fintech on capital allocation efficiency using data on Fintech firms from Jordan and Palestine between 2010 and 2020. Our central hypothesis is that while Fintech promotes financial inclusion, it may simultaneously lead to capital allocation inefficiencies. To measure the presence of Fintech, we use the number of Fintech firms in Jordan and Palestine. We find a striking pattern: the expansion of Fintech firms is associated reduce resource allocation to more efficient firms, suggesting systemic inefficiencies. Both the industry and corporate levels exhibit this trend. Mechanisms analysis reveals that this effect is driven by increased competition in the lending market and efficient stock swaps. Overall, we highlight how changes induced by Fintech in debt financing are the main cause of these inefficiencies. Our findings offer implications and insights for policymakers and Fintech companies by stressing the dual impacts of Fintech on financial markets in Jordan and Palestine. This underlines the necessity for a balanced approach to integrating Fintech innovations to ensure that the benefits of enhanced financial inclusion do not compromise financial efficiency and capital allocation. This study significantly contributes to the literature by delivering a comprehensive analysis of the intricate dynamics between Fintech, financial inclusion, and capital allocation efficiency in Jordan and Palestine.