Effects of digitalization on financialization: Empirical evidence from European countries

This study is the first to empirically examine the association of digital transformation and financial development. We measure digitalization in terms of digital connectivity, uses of the internet, e-business, e-commerce, and e-government. We also employ nine indicators to capture the depth, access, and efficiency of financial markets, institutions, and both. By using different econometric techniques to a sample of 27 European countries, we demonstrate the positive influences of digitalization on the developments of both financial markets and institutions. Among all dimensions of digitalization, digitalization in the business and public sector and individuals’ digital skills play a critical role in financial developments, while those in consumption may hinder financialization. With a prevalence of digital transformation, digitalization more likely enhances the depth and efficiency of financialization but shrinks the access to financialization. Our study also suggests the importance of digital transformation in the business and public sector in augmenting the depth and efficiency of financial markets, while digitalization in public sectors is an essential factor in driving access to financial markets. By measuring the short-run and long-run impacts of digitalization, we show that e-commerce and e-government have a long-term beneficial influence on financial markets and financial institutions, respectively.