THE EFFECT OF CONTROL OF CORRUPTION ON FINANCIAL DEVELOPMENT

Abstract

This thesis studies the effect of control of corruption on financial development using four aspects of financial development; depth, access, efficiency and stability. Previous studies have focused mainly on using corruption as an interaction term or using only one proxy for measuring financial development. Thus, this study adds new point of view to the current literature on corruption and financial development.

Panel data used in this study consists of 13 countries and 15-year period from 2000 to 2014. Generalized Method of Moments (GMM) is seen as a suitable method for statistical analysis since it accounts the most common problems with panel data, the problem of endogeneity of explanatory variables and the problem with country-specific fixed-effects.

The results show that control of corruption has significant and positive effect on financial depth and access. The effect stays persistent through robustness tests. Control variables compliment the effect on access while the effect on depth is even stronger when all the control variables are omitted. The results for efficiency are inconsistent, showing significance depending on the control variables used. Also the sign for the coefficient change with used control variables. Control of corruption seems to have significant impact on financial stability but the results are significant only when control variables are used.

More work needs to be done to find the effect of control of corruption on financial efficiency. Control variables used in this study were not appropriate ones for measuring turn-over ratio in stock markets. Also, the results of this study can be supported by using other proxies of access, depth and stability.