Financial markets versus institutions in European countries: Influence of culture and other national characteristics

While it is clear that some countries are bank oriented and others rely more on equity financing, there is little research on the degree to which the national architecture for financial intermediation is determined by legal, cultural, and other national characteristics. Using panel analysis of data for a recent eleven-year period for nineteen major European countries, this paper documents that the architecture of financial intermediation is influenced by national cultural, political, and economic factors. Specifically, we provide robust evidence that a greater predilection for market financing over bank financing is associated with higher levels of power distance, concentration in equity markets, control of corruption, efficiency of debt enforcement; and the adoption of the euro. Lower predilection for equity financing is associated with an English legal origin, greater uncertainty avoidance, and greater political legitimacy. Our results should be of great interest to managers and policy makers and to scholars interested in the relationship of culture, political economy, and financial intermediation.