Does inefficiency of judicial system matter on financial development-entrepreneurship nexus? New evidence on the worldwide level

This study seeks to answer three critical research questions: Does financial development aid in the establishment of new businesses? Is diversity in banking crucial for financial development and entrepreneurship? Does the link between financial development and entrepreneurship suffer from inefficiency of judicial system? We employ a worldwide heterogeneous unbalanced sample consisting of 60 countries (developed and developing) from 2006 to 2021, considering information about two key types of financial intermediaries: commercial and cooperative. Based on two distinct estimators (FEGLS and FEIVH), the empirical evidence confirms the critical role of financial intermediaries in fostering entrepreneurship, with commercial bank branches having a higher intensity. Furthermore, the inefficiency of the judicial system is found to be a crucial factor in mitigating the link under scrutiny. In other words, in a country with a dysfunctional judicial system, the financial system limits loan grants for general investments, resulting in a decrease in entrepreneurship. To put it another way, financial development helps to foster the establishment of new businesses in countries with more efficient judicial systems. A battery of sensitivity analyses back up our empirical predictions, shedding light on the importance of policy implications that may be implemented to ensure the evolution of the entrepreneurial fabric while also fueling a heated debate over the vital role of both financial and judicial systems.