Financial markets appear to improve the allocation of capital. Across 65
countries, those with developed financial sectors increase investment
more in their growing industries, and decrease investment more in their
declining industries, than those with undeveloped financial sectors. The
efficiency of capital allocation is negatively correlated with the
extent of state ownership in the economy, positively correlated with the
amount of firm-specific information in domestic stock returns, and
positively correlated with the legal protection of minority investors.
In particular, strong minority investor rights appear to curb
overinvestment in declining industries