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Financial development and declining market dynamics: Another dark side of “too much finance”?

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  • Xiaoyang Zhu

    (Wichita State University)

Abstract

This paper empirically investigates whether financial development has played a role in the rise of market concentration over the past decades. Using an industry-level panel of 41 countries over the period 1989–2010, we document a strong threshold effect of financial development on market competition. Specifically, the deregulation of capital and financial markets promotes product market competition in countries with initially low level of financial development. However, such positive effects vanish with the deepening of credit and stock markets. We identify two mechanisms through which financial development affects market competition in a nonlinear form: external finance dependence and technology gap within an industry. Our results further suggest that financial development may play a role in explaining the modern productivity growth slowdown puzzle.

Suggested Citation

  • Xiaoyang Zhu, 2023. "Financial development and declining market dynamics: Another dark side of “too much finance”?," Empirical Economics, Springer, vol. 65(1), pages 275-309, July.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:1:d:10.1007_s00181-022-02327-0
    DOI: 10.1007/s00181-022-02327-0
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    More about this item

    Keywords

    Financial development; Product market competition; External finance dependence; Technology gap;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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