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

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.