Are performances of banks and firms linked? And if so, why?

Abstract

Employing data sets from 46 countries, this paper identifies a significant positive relationship between the performance of the financial sector and the non-financial ones in the presence of a growth rate in the GDP and in inflation rates. To account for this relationship, we initially put forth four hypotheses. Results show that “bank concentration” (the first hypothesis) considerably strengthens the relationship but that the “protection of the creditor” (the second hypothesis) weakens it slightly. Noteworthy is that “restrictions on banks engaged in non-banking activities” (the third hypothesis) and the “bank-based system” (the fourth hypothesis) do not have any influence on the relationship, whatsoever.