The Finance-Growth Nexus in the Context of Financial Structure

Over recent decades, stock markets across the globe have developed tremendously taking a major role, similar to banks’ role, in financing firms. This persuaded economists to return with the old debate initiated by Goldsmith (1969) regarding financial structure. The bank-based system advocates favor the role of banks and criticize the role of markets in carrying out the financial growth-enhancing functions, whereas the market-based system proponents favor the role of markets and criticize the role of banks. On the other hand, proponents of the financial services and legal views are skeptical about the whole structure debate. Whether the market bank - based debate is genuine or myth; is a controversial question that should assist governments - especially with underdeveloped financial systems - to direct their financial development policies. This study has attempted to explore the finance-growth nexus in the context of the different financial structure hypotheses. Using pooled data from 65 developed and developing countries over the period 1988-2007 and employing graphical, correlation, and OLS regression analyses, the results support the market-based view over the bank-based and financial services views. Furthermore, by dividing the main sample according to the legal origins, evidence supporting the legal view and the relevancy of market-based systems in better legal environments has been found.