Financial structure and capital investment

This article studies the effects of financial structure on the growth of physical capital accumulation. Several theoretical works have proposed that banks are better than stock markets in funding capital investment. We test these theories with panel data for 62 industrial and developing countries using Generalized Method of Moments dynamic panel techniques. Results show that bank based financial systems are indeed associated with faster capital growth. This effect is especially strong in countries where banks can have close links to nonfinancial firms.