The role of institutional investors in the financial development

During last decades, financial assets and trading volumes of institutional investors have increased worldwide at a rapid pace, influencing the structure of financial system, encouraging innovation and efficiency and enlarging economy’s financing possibilities. In this paper, we assess how institutional investors influence financial development using a dataset covering 34 countries members of Organisation for Economic Co-operation and Development (OECD) during 1995–2019 period. Our results suggest that the increased presence of institutional investors, especially investment funds, is beneficial for the financial system as a whole, a finding that is robust across different specifications and estimation techniques, both static and dynamic. We extend our analysis by examining the main components of financial development and document that the effect manifests primary for financial institutions, whereas the influence on financial markets is found to be statistically insignificant. Therefore, institutional investors can improve the access to long-term investments and financial services. Findings bear critical policy implications for policymakers that seek to promote financial development as creating propitious conditions, robust regulatory environment and greater flexibility in investment regulations, especially for pension funds and insurance companies, will contribute to better risk-adjusted returns and thus enhanced development of the financial system.