Financial Development, Government Ownership of Banks and Firm Innovation

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)

40 Pages Posted: 8 Jun 2011 Last revised: 4 Oct 2013

See all articles by Sheng Xiao

Sheng Xiao

Westminster College (Utah)

Shan Zhao

City University of Hong Kong

Date Written: May 31, 2011

Abstract

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.

Suggested Citation

Xiao, Sheng and Zhao, Shan, Financial Development, Government Ownership of Banks and Firm Innovation (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), Available at SSRN: https://ssrn.com/abstract=1859350 or http://dx.doi.org/10.2139/ssrn.1859350

Sheng Xiao (Contact Author)

Westminster College (Utah) ( email )

1840 South 1300 East
Salt Lake City, UT 84105
United States

Shan Zhao

City University of Hong Kong ( email )

Hong Kong

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