Financial Development, Government Ownership of Banks and Firm Innovation
University of Minnesota
Grenoble Ecole de Management
May 31, 2011
Journal of International Money and Finance, Vol. 31, pp. 880-906
Presented at 3rd EMG Emerging Markets Finance Conference 2011 (London, UK)
China International Conference in Finance 2011 (Wuhan, China)
Using a newly available World Bank survey of over 28,000 firms from 46 countries, we examine how financial development affects firm innovation around the world. We find that while stock market development significantly enhances firm innovation, banking sector development has mixed effects. We show that the latter result can be explained by different levels of government ownership of banks. Specifically, in countries with lower government ownership of banks, banking sector development significantly enhances firm innovation; while in countries with higher government ownership of banks, banking sector development has no significant or sometimes even significantly negative effects on firm innovation. Such negative effects are significantly stronger for smaller firms. The results are robust to various controls such as firms’ human capital and ownership structure, to estimations using instrumental variable techniques and alternative measures of firm innovation.
Number of Pages in PDF File: 40Accepted Paper Series
Date posted: June 8, 2011 ; Last revised: May 7, 2012
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