Effects of Financial Development on Investments: New Evidence Considering Different Aspects of Financial Development

ABSTRACT This paper provides new evidence and insights about the finance‐investment nexus by assessing and comparing the impacts of different aspects of financial development on investment. The study uses data for 88 countries from 1996 to 2019, and the estimates are based on dynamic panel data methodology. Once the global financial crisis changed several structures, we also run regressions for the periods before and after the crisis to check whether the relationships change. Furthermore, to verify whether the results are not distorted by developed countries, the models are estimated for the full sample and for a sample of developing countries. The results reveal that higher levels of financial development are associated with higher levels of investment. In particular, the development of financial institutions depth and access to financial markets appears as the most important financial development variables for investments. The results also indicate that, after the global financial crisis, there was a change in the importance of the effects, increasing the impacts of financial development in terms of access to institutions and depth of institutions.