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Dissertation

Table of Contents

Abstract Chapter No .1 Chapter No. 2 Chapter No .3 Chapter No. 4 Chapter No.5 Chapter No.6 Introduction Literature Review Data and methodology Results Conclusion References

Role of Banks and stock markets in Economic Growth

Abstract
This paper studies the effects of stock markets and banks on the sources of economic growth, productivity and capital accumulation, using a large cross country panel that includes high- and low-income countries. Rousseau, P.L., 1995.Results show that, in low income countries, banks have a sizable positive effect on capital accumulation. We find that stock markets, however, have not contributed to capital accumulation or productivity growth in these countries. Given the emphasis that has been placed in developing equity markets in developing countries, these findings are somewhat surprising. Conversely, in high-income countries, stock markets are found to have sizable positive effects on both productivity and capital growth, while banks only affect capital accumulation. (P., Demetriades, P.O., Luintel, K.B., 2001)

Chapter 1: Introduction
This paper is analysis of banks and stock markets-based financial systems in economic growth and development. The banking system has facilitated the personal transactions such as deposit and remittance of money, and lending and borrowing of money. It has made easier to develop agriculture, industry and trade. At the same time, it has helped to accelerate the pace of economic development. The bank helps in mobilization and allocation of scarce resources, which are essential for economic development. Banks also give counsel in financial matters. Banks employ people who are experts on various fields, who can advise companies and businessmen on their financial problems. (Beck T, Levine R (2004) Stock markets, banks and growth.) Stock market is an important part of the economy of a country. The stock market plays a play a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent R., Loayza, N., 2000.That is reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industrys point of view as well as the investors point of view. Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. Stock market is the primary source for any company to raise funds for business expansions. Stock market is the primary source for any company to raise funds for business expansions. ( (R., Loayza, N., 2000.)) Bank-based or market-based system is better in capital allocation and economic performance has long been a focus of debate. The relative merits of bank-based and market-based systems can be summarized as follows: While bank-based systems can survive in environments of poor contract enforcement and greater moral hazard, market-based systems are superior in solving incomplete information problems that are pertinent in valuation and real investment decisions. Specifically, for instance, it might be more efficient for underdeveloped and developing countries, which

generally have low levels of rule of law indicators, either to give priority to advance their banking system or to promote the functioning of their financial markets on their challenging path towards development.( (Rousseau, P.L., 1995) A financial systems major tasks include mobilizing resources for investment, selecting investment projects to be funded, and providing incentives for the monitoring of the performance of the funded investments. A large body of theoretical and empirical research analyzes how these tasks are performed in a market-based system, and how they are performed in a system where banks and other financial intermediaries play a major role. P.O., Luintel, K.B., 2001.This research identifies significant differences in incentives to monitor firms. These differences raise the possibility that a bank-based or a market-based system is inherently superior and that economic performance can be enhanced by adopting the superior system. In our examination of the differences between bank-based and market-based financial systems we adopt a hypothesis that has elements of both these approaches. We are motivated to study this particular issue because of a long-standing debate on the relative importance of the two systems. A bank-based or market-based system emerges endogenously. (King, R.G., Levine, R., 1993a. Finance and growth) Bank monitoring and resolves moral-hazard problems: Bank monitoring resolves moral-hazard problems at the level of the firm. Firms with lower marketable collateral and higher incentive problems borrow from banks, while wealthier firms rely on intermediated market-finance. Some authors have also highlighted how market finance creates appropriate incentives for a firm. Equity markets encourage corporate governance through hostile takeovers of under-performing firms. Rajan and Zingales (1998b, 1999) argue that market-finance transmits a price signal which guides firms into making worthwhile investments. Finance is relevant for growth and development for two main reasons. Better developed financial systems resolve agency problems better. The bank collects idle money from people. This money is channeled by banks to the individuals, businesses and government for productive investments. This enables firms to borrow at cheaper rates and invest more. But finance also plays a role in structural transformation. We distinguish between bank-finance and market finance based upon their involvement with investment projects. (Zingales (1998b, 1999)) Banks are typically more hands-on, engaged in project selection, monitoring firms and identifying promising entrepreneurs. In bank-based financial systems, banks play a leading role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and in providing risk management vehicles. In market-based financial systems such as securities markets share center stage with banks in terms of getting societys savings to firms, exerting corporate control, and easing risk management. Securities markets and bank development have a different effect on the type of external finance firms obtain, particularly at relatively low levels of financial development. Some analysts suggest that markets are more effective at providing financial services. (Schumpeter (1912))

 Testing for differences in performance between the systems: Differences between outcomes in market-based and bank-based systems should, if they exist, be observable at the country, industry, or firm levels. In principle, a test would relate a performance measure, usually the growth rate, to the financial system or legal system characteristics. While this results in straightforward applications at the country level, there exists a potential selection bias when this procedure is applied at lower levels of aggregation, such as the industry and firm levels. The selection bias arises because the way in which production is organized in different countries depends on their legal and financial systems. Thus, the firms observed are adapted to the financial system of that country. Analyzing growth rates of those firms does not take into account the possibility that a different financial system might induce a different mix of firms and that the different mix might increase wealth. ( (King, R.G., Levine, R., 1993)) Capital accumulation and productivity growth: Banking development and stock market liquidity are both good predictors of economic growth, capital accumulation, and productivity growth. In common with the legal approach, we posit that the absolute equality of the banks and securities markets in a country depends on the legal systems ability to enforce contracts. However, we argue that the legal systems in different countries can have a comparative advantage in supporting a quality banking system or quality securities markets. Thus, for example, a country with an inefficient legal system can have a lowquality financial system. An alternative approach, developed in Demirg.u-c-Kunt and Maksimovic (1998), is to test for differences between financial systems by testing whether the proportion of firms growing at rates that exceed the rate that they can self-finance, or finance using short-term instruments only, differs across different financial or legal systems. This approach would identify the financial system in economy M above as being superior. Historically, economists have focused on banks. A. Schumpeter (1912) emphasize the critical importance of the banking system and stock mark in economic growth and highlight circumstances when banks can actively spur innovation and when banks can actively spur innovation and future growth by identifying and funding productive investments. However, a country can, through a combination of administrative regulation of the banking system and strong banks with bargaining power their customers, partially compensate for the effect of the deficiency of the legal system on banks. It can be more difficult to compensate for the effect of poor legal protections on securities markets. Thus, while the level of development of a countrys legal system can determine the quantity of financial services supplied, the comparative advantage in supporting intermediaries and markets determines the optimal mix of banks versus markets. ( (Beck T, Levine R (2004)Banks, Stock markets, and growth:)) Some authors have also highlighted how market finance creates appropriate incentives for a firm. The banks increase the participation of the private sector in economic development by making available the loans easily on reasonable rate of interest. They find that both banking system development and stock market liquidity are significantly correlated with contemporaneous and future economic growth, capital accumulation and productivity enhancement. Higher income countries, stock markets become more active and efficient relative to banks. There is some tendency for national financial systems to become more market oriented, as they become richer. ( (R., Loayza, N., 2000.))

Banks can also have a comparative advantage in providing short-term financing. Banks are typically more hands-on, engaged in project selection, monitoring firms and identifying promising entrepreneurs. Measures of both banking development and stock market liquidity enter the growth regression significantly. On the other hand, investment through the purchase of trade able securities, or market-finance, is more of an arms length transaction, with very little subsequent involvement in a firms investment decisions. (( (Beck T, Levine R (2004)Banks, Stock markets, and growth:)))

2- Literature Review
The literature also shows that stock markets and banks both develop economic growth. The positive effect on economic growth is obtained through both greater physical capital accumulation and greater productivity growth. Less is known, however, about the effects of stock markets and banks on the two sources of economic growth physical Capital accumulation and productivity growth and in particular whether these effects vary between high- and lowincome countries. Financial markets will fund these innovation activities leading to larger productivity gains innovation-based growth. It is important then to understand the driving forces for each of the two sources of growth and in particular the role that different components of the financial markets play. ( (Barth, J.R., Caprio Jr., G., Levine, R., 2001) Second, in addition to the effect on economic growth, the literature provides theoretical arguments for the effects of stock markets and banks on the sources of growth, but the empirical literature has analyzed primarily their effect on overall growth. Hence, our objective is to focus on the sources of growth. The theoretical literature proposes that both banks and stock markets are expected to enhance productivity. Stock markets are essential for productivity growth. Individual investors agree to disagree on the feasibility of new investment projects. With disaggregated decision making in stock markets, each investor makes a decision whether or not to invest; as a result more innovative projects receive financing. Stock markets become more important when economies approach the scientific edge where innovation is the primary source of growth. (Beck T, Levine R (2004) Stock markets, banks and growth) According to theory, banks are also important for productivity growth. Bhide (1993) argues that banks raise productivity by monitoring firm managers and improving corporate governance. Similarly, both banks and stock markets provide financing for physical capital accumulation. Liquid stock markets allow investors to convert shares into cash in case they experience a liquidity shock. With reduced liquidity risk, investors are willing to commit funds to capital investments. Other theoretical work shows that banks are also important for physical capital accumulation. Therefore they finance capital investments even in weak institutional environments. Stulz (2001) points out that bank can commit funds to capital investments that require financing in successive stages. In summary, the theoretical literature argues that banks and stock markets both enhance productivity growth and physical capital accumulation. (Bhide (1993)) We use data from a large panel of countries to test these hypotheses. Furthermore, we investigate the influence of stock markets and banks on the sources of growth in developed and developing

countries. Banks may be especially important in developing countries where stock markets are smaller and less active. As countries develop, their stock markets may start to play a more significant role. Our empirical findings are that: 1) banks primarily affect capital growth while stock markets primarily affect productivity; 2) in high income countries, however, there is strong evidence that banks and stock markets have independently affected capital growth, while productivity seems to be driven by the stock market only; and 3) in low income countries, conversely, bank credit is the primary driver of capital accumulation. However, neither stock markets nor banks seem to affect productivity growth. ( (R., Zervos, S., 1998) Our paper is not the first one to consider the effects of stock markets and banks on the sources of growth. Levine and Zervos find that measures of stock market and credit market development both enter significantly in equations explaining capital and productivity growth. The market-based view stresses both the positive role of markets and the comparative advantages of markets over banks in effectively allocating capital. Also, efficient markets can minimize the effectiveness of takeovers. Efficient markets reduce incentives for individuals to research firms because any new information they uncover is quickly reflected in public stock prices before the individual can exploit the fruits of the research. Proponents of market-based systems emphasize the efficient capital allocation function of markets and costs of bank financing. Allen (1993) argues that stock markets provide incentives for a large number of investors to check what the firm is doing. This repetitive checking process is the great advantage of stock markets over banks, which allow checking to occur only relatively few times. Relatively few studies assess the relative merits of alternative financial structures conditional on certain country specific factors. Bank-based systems can survive, because the parties have the incentive to maintain their reputations in order to ensure the continuity of future business. The Structure-Size variable is calculated as the log of the ratio of Market Capitalization (the value of listed shares divided by GDP) to Bank Credit. Their Financial Structure measure is the first principal component of the activity and size variables. Similarly, financial structure index using the relative size, activity and efficiency of the stock market in a given country as compared to the banking sector. (Levine, R., Loayza, N., 2000. Finance and the sources of growth) Tadesse (2002) argues that effectiveness of the two systems depend on country-specific factors, such as contractual, legal and institutional environments, and these factors are associated with the level of financial development. He finds that among countries with developed financial markets, market-based systems yield higher real economic performance, while bank-based systems are superior among underdeveloped financial markets. He also argues that bank-based systems work better in weak legal and institutional environments. Financial institutions play a crucial role in an economy as they have a variety of functions that contribute to better capital provision and allocation. (Tadesse (2002) The relative importance of bank-based and market-based systems depends on how effectively markets perform the information feedback function (the supply side) and the value of this information for the firm (the demand side). Levine, R., 1993 on the supply side, since contracts and legal enforceability are central for markets, weak legal enforceability and poor institutional infrastructure slow down the functioning of markets by reducing the supply of information

feedback. However, banks can survive in such environments, as they are able to replace the lack of legal enforceability with their loan collection skills to protect their interests. Industries in bank-based countries grow faster than those in market-based systems across financially underdeveloped economies. Across financially developed economies, industries in market-based systems grow faster than those in bank-based systems. (King, R.G., Levine, R., 1993)) The above mentioned discussion leads to the following premise: whether a bank-based or market-based system is better for a countrys economic performance may depend on countryspecific institutional and legal environments as well as the level of financial development, which have effects on remedying incomplete information, potential of moral hazard and problems of contract enforcement Patrick 1966. One candidate for such country specific institutional and legal factors that may have a potential effect on the relative merits of bank-based and marketbased systems is rule of law. With regard to transparency, since bank based systems are characterized by long term relationships between borrowers and the financier, preserving opacity is dominant. On the other hand, transparency is essential in a market-based system to guarantee protection. ( (Patrick (1966)) A thorough understanding of the relationship between stock market and economic growth is vital to investors in such a way that it could help them foresee upcoming market movement in accordance to stock market activities R., Zervos, S., 1998. This will lead to a more credible investment verdict. It also benefits both the government and private sectors greatly as the empirical facts would serve as a useful guidance and reminder for them to always scrutinize the effectives of each policy they implement. In recent years, stock market development is a common feature of financial and economic development in the developing countries. (R., Zervos, S., 1998)) Although a literature suggests that well-functioning banks accelerate economic growth. (Schumpeter (1912)) Using measures of bank development that includes only credit to private firms and therefore exclude credit to the public sector. Omitting stock market development makes it difficult to assess whether (a) the positive relationship between bank development and growth holds when controlling for stock market development, (b) banks and markets each have an independent impact on economic growth(c) overall financial development matters for growth but it is difficult to identify the separate impact of stock markets and banks on economic success. (P.O., Luintel, K.B., 2001. Financial development and economic growth) Levine and Zervos find that initial measures of stock market liquidity and banking sector development are both strong predictors of economic growth over the next 18 years. To measure bank development, they use bank credit to the private sector as a share of GDP. Levine and Zervos They use an assortment of stock market development measures, including the overall size of the market (market capitalization relative to GDP), stock market activity (the value of trades relative to GDP), and market liquidity (the value of trades relative to market capitalization). Use initial values of stock market and bank development. First, the goal is to assess the relationship between stock markets, banks, and economic growth. (Levine and Zervos (1998) More specifically, we examine whether measures of stock market and bank development each have a positive relationship with economic growth. We also assess whether the stock market and

bank indicators jointly enter the growth regression significantly. Patrick (1966) formalizes both approaches to the direction of causality between finance and economic growth. He suggests a demand-following process in which financial institutions develop in response to the increasing demand of the real side of the economy for these kinds of institutions (which might be a consequence of economic growth). On the other hand, the supply-leading hypothesis supposes that the banking system develops in advance of the demand for banking services, provides efficient resource allocation and hence stimulates entrepreneurship and economic growth. However, the development of endogenous growth 1980's provided a theoretical explanation of the impact of financial development on economic growth in the long run. (Beck T, Levine R (2004) Stock markets, banks and growth)

3-

Data and measures:

The data set consists of a panel of observations 2007-2012 for four Asian countries Pakistan, India, Srilanka and Bangladesh. The theories we are evaluating focus on the long-run relationships between stock markets, banks, and economic growth. The role that stock markets and banks may play in reducing informational and lowering transactions costs. Beck T, Levine R (2004).To measure stock market development the trades of shares on domestic exchanges divided by total value of listed shares. It indicates the trading volume of the stock market relative to its size. This section describes the indicators of stock market and bank development, the conditioning information set, presents descriptive statistics, and provides Correlation results of stock markets, banks, and economic growth.

Data 2007-2012

Variables
Total debt service Market capitalization Private credit Primary income Services, value added Gross capital formation Domestic credit provided by banking sector GDP growth Income share Revenue, Stocks traded, turnover ratio Depositors Bank capital to assets ratio

2007 10.46028 1.835031 35.70011 52.64353 70.16191 52.77073 22.55651 48.43575 6.177542 22.55651 14.46979 2.823764 43.46081

2008 7.653087 1.800838 49.07568 52.87662 33.16754 52.64353 22.05088 53.21005 5.683116 22.05088 13.42743 2.027869 46.76431

2009 16.24451 2.092656 14.33304 53.70531 14.53899 52.87662 18.21725 48.44259 1.595981 18.21725 14.01764 2.734569 51.30452

2010 19.91245 2.352988 20.54056 53.38427 7.319907 53.70531 15.56241 46.38437 3.595355 15.56241 13.86107 1.884488 47.19722

2011 12.35926 1.342825 21.62802 53.42299 4.812096 53.38427 13.07483 43.28486 3.546805 13.07483 12.39896 1.581609 35.90239

2012 18.31641 18.89261 15.5469 54.39056 5.176152 53.42299 12.52224 44.51547 2.955866 12.52224 12.28222 1.453638 33.6679

Calculated in Excel:

Variables
Growth
Total debt service Market capitalization Private credit Primary income Services, value added Gross capital formation Domestic credit provided by banking sector GDP growth Income share Revenue, Stocks traded, turnover ratio Depositors Bank capital to assets ratio

median
14.30 1.96 21.08 53.40 10.92 53.13 16.88 47.41 3.57 16.88 13.64 1.95

9.72 1.25 36.91 52.68 54.57 52.68 23.55 51.08 4.86 23.55 14.44 2.77 49.64

Average 14.15 4.71 26.13 53.40 22.52 53.13 17.33 47.37 3.92 17.33 13.40 2.08 43.04

45.11

The sources of economic growth

We follow a standard method, for example as in Easterly and Levine (2001), to calculate physical capital growth. The variable Capital Growth is then computed as the growth rate of this capital stock per person. The dependent variable is the growth rate of capital accumulation. The results below show the coefficient estimates for each bank measure and stock market measure combination obtained from two-step, the banking measures are generally statistically significant. The stock market measures, on the other hand, are not statistically significant at conventional 5% levels. There may be several explanations for this finding. While stock markets have been established in low income countries, perhaps they have not yet reached the minimum levels of size and activity to supply significant amounts of funding to domestic enterprises. (Levine (2001) Therefore, banks have remained the primary suppliers of funding for capital accumulation. It is also possible that the strong links developed between businesses and banks for many years prior to the establishment of stock markets account for a strong preference by firms to keep borrowing from banks rather than issue equity. To calculate Productivity Growth, we formulate a production function in per unit of labor terms as: y = Ak Then taking logarithms, productivity is computed according to, where y is output per person and k is capital per person. This

specification is the one that has been most commonly used in the financial development-growth literature in Papers by (Beck et al. (2000) and Rioja and Valves (2004).

Financial sector variables

Three measures of banking development are used. First, Bank Credit is the credit that deposit money banks have issued to the private sector as a share of GDP. Three measures of banking development are used. Beck T, Levine R (2004) First, Bank Credit is the credit that deposit money banks have issued to the private sector as a share of GDP. Second, Bank Deposits is the total amount of demand, time and saving deposits in deposit money banks as a share of GDP. Third, Private Credit is the credit issued by all financial intermediaries (excluding central banks) to the private sector as percent of GDP. While this measure includes intermediaries in addition to banks, banks still account for a major share. The descriptive statistics show that Bank Credit and Bank Deposits average about 55% of GDP, while Private Credit is about 60% of GDP. (Beck T, Levine R (2004) Three measures of stock market development and activity are also used. Beck T, Levine R (2004) First, the Turnover Ratio measures the value of the traded shares in the domestic stock market divided by the total value of shares in the market. It measures how active or liquid the stock market is relative to its size. Second, Value Traded is the value of all shares traded in the stock market as percent of GDP. It measures how active the stock market is as a share of the economy. Third, Market Capitalization is the total value of all shares in the stock market as percent of GDP; it measures the size of the stock market. Hence, the three measures of stock markets capture different aspects: liquidity with respect to market size, liquidity with respect to the economy size, and size with respect to the economy. (Beck T, Levine R (2004)

4- Methodology
We use statistical techniques Correlation analyses to address potential in the data. This technique has become standard in the literature in the past few years. Beck and Levines on stock markets and banks also use this approach the lagged dependent variable, which enters as an independent explanatory variable is correlated with the country-specific components. Using proper instruments for the contemporaneous values of the explanatory variables is therefore preferable to using initial values. To assess the relationship between stock market development, bank development and economic growth in a panel, we use the Correlations. There are, however, conceptual and statistical shortcomings with this difference estimator. The equation in levels uses the lagged differences of the explanatory variables as instruments under two conditions. First, the error term is not serially correlated. Second, although there may be correlation between the levels of the explanatory variables and the country-specific. These are appropriate instruments under the following additional assumption: although there maybe correlation between the levels of the right-hand side variables and the country-specific

effect. Both the difference and the system estimator present certain problems when applied to samples with a small number of cross sectional units.

Calculated in Excel:

Correlation
Total debt service Market capitalization Private credit Primary income Services, value added Gross capital formation Domestic credit provided by banking sector GDP growth Income share Revenue, Stocks traded, turnover ratio Depositors Bank capital to assets ratio

Results
0.603526 0.998427 0.975215

0.9844 0.8915 -0.83 0.7186 -0.8016 0.99 0.7186 0.7864 0.3265 -0.89

5- Results
Capital growth
We ran various specifications to establish how banking and stock markets affect capital growth. The banking measures are generally statistically significant. The stock market measures, on the other hand, are not statistically significant at conventional 5% levels P.O., Luintel, K.B. 2001.These results indicate that, when looking across a wide range of countries, banks have a strong positive effect on capital accumulation, but stock markets do not. Overall, the results show that banks are significant determinants of capital growth, while stock market measures are not. It is useful to interpret the economic significance of the coefficients. Furthermore, these results would agree with Lin (2009) that developing counties need banks and not more sophisticated financial institutions. There may be several explanations for this finding. While stock markets have been established in low income countries, perhaps they have not yet reached the minimum levels of size and activity to supply significant amounts of funding to domestic enterprises. (P.O., Luintel, K.B., 2001.) Therefore, banks have remained the primary suppliers of funding for capital accumulation. It is also possible that the strong links developed between businesses and banks for many years prior

to the establishment of stock markets account for a strong preference by firms to keep borrowing from banks rather than issue equity. R., Zervos, S., 1998 Compare the results above with those from High Income countries. Both banks and stock markets are statistically significant in some of the regressions, though the results are mixed. The bank measures Bank Credit and Private Credit are statistically significant in every regression, as is the stock market measure Market Capitalization. Again, it is useful to interpret and compare the coefficients to those for Low Income countries. We focus on the regression that uses the Bank Credit and Value Traded measures to be consistent. ((Wachtel, P., Rousseau, P.L., 1995)) Consider the regression that uses the Bank Credit and Value Traded Measures (the second cell on the first row). Regarding the coefficient estimates for the stock market variables, they are generally not statistically significant for Low Income countries. This is somewhat of a surprising finding given that stock market development in Low Income countries has received lots of attention in the last 1520 years. ( (Levine, R., 1998.))

Productivity growth
We rerun the above estimations with Productivity Growth as the dependent variable. When looking at the all-countries sample, bank measures and stock market measures are generally not significant. Only Market Capitalization is significant in all regressions. The dependent variable is the growth rate of productivity. The results below show the coefficient estimates for each bank measure and stock market measure. When using the Bank Credit and Value Traded measures and adding other controls on Value Traded is significant and positive in every regression. (Levine, R., 1998.) The picture becomes clearer looking at the two income groups separately. For the Low Income countries neither bank measures nor stock market measures are statistically significant. (R., Zervos, S., 1998.)This is a fairly sizable increase considering that productivity grows at 1.3% per year in these advanced countries. In sum, stock markets generally boost productivity growth in High Income countries. Productivity growth in Low Income countries has been affected by banks or stock markets. For High Income countries, on the other hand, stock markets are significant in a join of regressions. (R., Zervos, S., 1998.)

6- Conclusions
This paper studies the effects of stock markets and banks on capital accumulation and productivity growth. We find that bank credit primarily affects capital accumulation across all countries. We also find that stock markets primarily affect productivity growth. Our main contribution arises when we study Low and High Income countries separately. In Low Income countries, banks are essential as they have a sizable positive effect on capital accumulation. We find that stock markets, however, have not contributed to capital accumulation or productivity growth in these countries. Perhaps the size and activity of equity markets in developing countries has not yet reached levels where they are significant determinants of the sources of growth.

Nevertheless, given the emphasis that has been placed in developing equity markets in developing countries, these findings are somewhat surprising. Finally, the securities markets and the banking system affect firms ability to obtain financing in different ways, especially at lower levels of financial development. These results seem to provide support for Lins (2009) argument that financial markets in developing countries should be focused on banks. Stock market development and bank development jointly enter all of the system panel growth regressions significantly using alternative conditioning information sets and alternative panel estimators conversely, in high-income countries, stock markets are generally found to have sizable positive effects on both productivity and capital growth, while banks only affect capital accumulation. The findings show that the overall level of financial development along with effective contract enforcement mechanisms further new establishment formation and more efficient capital allocation. Banking system and Stock market development on firms growth is closely tied to the level of development of the countrys contracting environment. Thus, for these countries differences in contracting environments that affect the relative development of the stock market and the banking system may have implications for which firms and which projects obtain financing. The relationship between the financial system and long-run growth more comprehensively, we need theories in which both stock markets and banks arise and develop simultaneously while providing different bundles of financial services to the economy. They underscore the importance of differentiating between the sources of growth, the different components of the financial system, and countries at different stages of development.

______________________________________________________________

7- References:
(Demirg.u-c-Kunt, A., Levine, R., 2001. Bank-based and market-based financial systems: a cross-country) (Barth, J.R., Caprio Jr., G., Levine, R., 2001c. Banking systems around the globe:) (Journal of Applied Finance & Banking, vol.2, no.5, 2012, 159-176) (R. Levine, Bank-based or market-based financial systems: Which is better?) (R. Levine, Financial development and economic growth: views and agenda,) (Arestis, P., Demetriades, P.O., Luintel, K.B., 2001. Financial development and economic growth: The role) (Beck, T., Levine, R., Loayza, N., 2000. Finance and the sources of growth. Journal of Financial)

(King, R.G., Levine, R., 1993a. Finance and growth: Schumpeter might be right.) (Beck T, Levine R (2004) Stock markets, banks and growth: panel evidence. J Bank Financ 28(3):423 442) (Beck T, Levine R, Loayza N (2000) Finance and the sources of growth. J Financ Econ) (R., Zervos, S., 1998. Stock markets, banks, and economic growth. American Economic Review ) (Wachtel, P., Rousseau, P.L., 1995. Financial intermediation and economic growth:) (Rousseau, P.L., Wachtel, P., 2000. Equity markets and growth: Cross-country evidence on timing and) (Levine, R., 1998. The legal environment, banks, and long-run economic growth. Journal of Money,) ((Modigliani, F., and E. Perotti, 1999, Security Markets versus Bank Financing and the)