Markets and Institutions in Financial Intermediation: National Characteristics as Determinants

Abstract

Given the importance of financial intermediation and the rise of globalization, there is little prior research on how national preferences for financial intermediation (markets versus institutions) are determined by cultural, legal, and other national characteristics. Using panel analysis for data on a recent eight-year period for thirty countries, this paper documents that national preferences for market financing increase with political stability, societal openness, economic inequality, and equity market concentration, and decreases with regulatory quality and ambiguity aversion. We confirm with robustness tests that our result for regulatory quality is independent of differences in national wealth and that our result for political stability is independent of both wealth and political legitimacy. These results should be of much interest to managers, scholars, regulators, and policy makers.

Keywords: financial institutions, banks, financial markets, universal banks, comparative financial systems, legal traditions, uncertainty avoidance, trust, property rights

JEL Classification: G10, G20, N20, O16