U.S. Financial Markets Growth and the Real Economy

48 Pages Posted: 7 Dec 2010 Last revised: 8 Dec 2013

See all articles by Claire Y.C. Liang

Claire Y.C. Liang

Georgetown University

R. David McLean

Georgetown University - Department of Finance

Mengxin Zhao

Independent; Securities and Exchange Commission (SEC)

Date Written: September 2013


U.S. financial development varies a good deal over the last half century, primarily increasing since the 1980s. We ask whether this variation had consequences for the real economy. Difference-in-difference tests reveal that increases in financial development have disproportionate effects on industries that depend more on external finance. Higher financial development forecasts externally dependent industries using more external finance, having higher turnover of leading businesses, greater variation in firm-growth rates, more new firms entering, more mature firms exiting, lower concentration, and at the aggregate level more innovation and faster growth. The mosaic of our evidence is consistent with a Schumpeterian framework linking the supply of finance to competition, innovation, and growth. Our findings suggest that the growth in finance had some real effects that are socially beneficial.

Keywords: Financial dependence, Financial development, Innovation, Research and Development, Creative Destruction

JEL Classification: G30, G31, G32

Suggested Citation

Liang, Claire Y.C. and McLean, R. David and Zhao, Mengxin and Zhao, Mengxin, U.S. Financial Markets Growth and the Real Economy (September 2013). International Conference of the French Finance Association (AFFI) 2011, Available at SSRN: https://ssrn.com/abstract=1720717 or http://dx.doi.org/10.2139/ssrn.1720717

Claire Y.C. Liang

Georgetown University ( email )

Washington, DC 20057
United States

R. David McLean (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC Washington DC 20057
United States

Mengxin Zhao

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States


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