Corporate restructuring and agency theory.

Abstract

Past empirical analysis of the relationship between financial development and economic growth in the US suggests that capital market development has no impact on long-run economic growth. However, analysis of the same data used previously reveals the existence of trends and breaks which past studies failed to take into account, hence, rendering their results questionable. Therefore, this paper uses recent advances in time series techniques and investigates the issue again within a VEC model that allows for the presence of trends and breaks in the data. In this framework, we test for long-run causality between stock market development and economic growth after controlling for banking development and stock market volatility. Using three alternative measures of stock market development, the findings of our empirical analysis provide strong evidence that capital market development has a long-run causal impact on output growth in the US.