Financial Sector Structure and Economic Growth: A Fresh Look With a Focus on Denmark

Marc Steffen Rapp

    Research output: Working paperResearch


    Economists consider a well-functioning financial sector to be of first order importance for a modern (capitalist) economy. However, in the aftermath of the financial crisis a debate about the future role of the financial sector emerged and many commentators have called into question whether the financial sector actually creates value for the wider society. This research, which is part of a broad research project “Nordic Finance and the Good Society”, aims to contribute to this debate by studying the role of the financial sector structure for economic development of an economy. Therefore, it proceeds in five steps. First, it provides some reflections on the financial sector and the existing literature studying financial sector structure and its association with economic development. Second, it presents stylized firm-level evidence on capital structure choice and firm behavior. It is argued that over time equity financing (bank credit) becomes more (less) important for the corporate sector in developed economies. Third, it reports novel country-level evidence on the link between financial sector structure and economic growth in developed economies. The results suggest that the capital market – and in particular the stock market – is beneficial for economic growth in these countries. Simultaneously, the analysis suggests that caution is warranted with high levels of private credit volume as they seem to be detrimental to economic development. Fourth, it provides cross-country comparison of various measures of financial sector structure. Thereby, it pays special attention to the Danish financial sector, which is found to be relatively large but skewed towards debt and credit. Moreover, the Danish bond market, while relatively large, seems dominated by banks and corporates seem virtually absent. Finally, it concludes by arguing for more capital market-based financing solutions and discusses selected challenges for the future direction of the Danish financial sector.
    Original languageEnglish
    Place of PublicationFrederiksberg
    PublisherCenter for Corporate Finance, CBS
    Number of pages90
    Publication statusPublished - 18 Aug 2016
    SeriesDiscussion Paper / Center for Corporate Finance. Copenhagen Business School

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