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Financial Development and Capital Allocation Efficiency Nexus: Do Sources and Dimensions of Financial Development Matter?

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  • Yagli , Ibrahim

    (Nevşehir Hacı Bektaş Veli University, Turkey)

  • Cetenak , Emin Huseyin

    (Nevşehir Hacı Bektaş Veli University, Turkey)

Abstract

The study aims to investigate the impact of financial development on capital allocation efficiency and determine its significance in this effect, considering sources and dimensions. A high capital expenditure in response to growth potential, as shown by the increase in value-added, is required for effective capital allocation. This study examines 50 countries with at least 25 years of data, between 1980-2016. Calculating the parameters that show capital allocation efficiency is the first step in the analysis. The impact of financial development on the effectiveness of capital allocation is examined in the second stage. The findings indicate that development of financial institutions contribute significantly to the capital allocation process. Moreover, up until a certain point, the depth of the financial system makes the most contribution to effective capital allocation; however, after that point, the contribution stops, and changes in this dimension have a negative impact on allocation efficiency.

Suggested Citation

  • Yagli , Ibrahim & Cetenak , Emin Huseyin, 2023. "Financial Development and Capital Allocation Efficiency Nexus: Do Sources and Dimensions of Financial Development Matter?," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 48(2), pages 83-103, June.
    • Handle: RePEc:ris:jecdev:0059
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital Allocation; Investment; Financial Development;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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