U.S. Financial Markets Growth and the Real Economy

Abstract

U.S. financial development varies a good deal over the last half century, primarily increasing since the 1980s. We ask whether this variation had consequences for the real economy. Difference-in-difference tests reveal that increases in financial development have disproportionate effects on industries that depend more on external finance. Higher financial development forecasts externally dependent industries using more external finance, 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 mosaic of our evidence is consistent with a Schumpeterian framework linking the supply of finance to competition, innovation, and growth. Our findings suggest that the growth in finance had some real effects that are socially beneficial.