Markets versus institutions in developing countries: National attributes as determinants

While there is some discussion of national preferences for banking versus financial markets, there is little research on how national financing preferences are determined by legal, cultural, and other national characteristics. Using panel analysis on data for a recent eight-year period for sixteen emerging-economies, this paper documents that, in such countries, an increased predilection for equity markets is associated with increased prevention of corruption and countries being Asian. A decreased predilection for financing via equity markets is associated both with greater power of bank regulators and with more globalization and an English legal origin. One interpretation of our results suggests that while common law promotes both banking and financial markets, common law and societal openness act to promote banking more than markets in less developed environments. Our results have important public policy implications given that financial systems are still evolving in developing countries.