U.S. Financial Markets Growth and the Real Economy

Abstract

U.S. financial development varies significantly over the last half century, primarily increasing since the 1980s. Difference-in-difference tests reveal that financial development has disproportionate effects on industries that depend more on external finance. Higher financial development forecasts externally-dependent industries having higher turnover of leading businesses, greater variation in firm-growth rates, more new firms entering, more mature firms exiting, lower concentration, and at the aggregate level more innovation and faster growth. The evidence is consistent with a Schumpeterian framework linking finance to competition, innovation, and growth. Our findings suggest that the growth in finance had some real effects that are socially beneficial.