Institutions, Culture, or Interaction: What Determines the Financial Market Development in Emerging Markets?

In this research, we examine how the quality of institutions promotes financial market development (FMD) in 21 emerging markets (classified by the Financial Times Stock Exchange Group). The moderating role of culture is also empirically tested. For this purpose, a balance panel dataset of 21 emerging markets from 1984 to 2020 is utilized from various secondary data sources. The study applies two-stages least square regression with the instrumental variable, and lag transformation to overcome the endogeneity problem in the nexus of institutions and finance, which is least focused on in prior literature. The empirical findings show that institutional quality and the national culture promote FMD in these economies. The main findings are consistent with law and finance, and financial socialization theories. We argue that academics, policymakers, and researchers should comprehend the critical role of institutional and cultural indicators in forming an effective financial system that may lead to sustainable economic development. This research contributes to the literature on emerging markets in this helpful paradigm. We conclude that quality institutions play a critical role in magnifying the FMD of emerging markets. It is crucial to comprehend the connection between FMD and institutions, as the growth dividend from financial development can be boosted by strengthening institutions and understanding the culture. Our results are robust to alternative measures of institutions and FMD and the correction of potential endogeneity.