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A new measure of financial development: Theory leads measurement

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  • Boyd, John H.
  • Jalal, Abu M.
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    Abstract

    This study presents a new measure of financial development that is directly derived from theory. Our measure, the Marginal Utilization of Debt (hereafter, MUD) comes from the seminal work of Myers (1984), Myers and Majluf (1984) and Shyam-Sunder and Myers (1999). Further, it is directly related to the development facts of Gurley and Shaw (1955). MUD is a global measure that reflects conditions in both debt and equity markets. It varies enormously across nations; from 0.23 in Australia at one extreme to 0.96 in Turkey at the other. Cross‐country variations in MUD are not random; they are related to special‐purpose measures of debt and equity market advancement from the financial development literature. Richer, more advanced nations have smaller average MUDs. We argue that the MUD may be useful for a variety of purposes and provide three example applications.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Development Economics.

    Volume (Year): 99 (2012)
    Issue (Month): 2 ()
    Pages: 341-357

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    Handle: RePEc:eee:deveco:v:99:y:2012:i:2:p:341-357

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    Web page: http://www.elsevier.com/locate/devec

    Related research

    Keywords: Financial development; Financial markets; Debt;

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    References

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    Cited by:
    1. Manoel Bittencourt & Rangan Gupta & Lardo Stander, 2013. "Tax evasion, financial development and inflation: theory and empirical evidence," Working Papers 201316, University of Pretoria, Department of Economics.

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