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This study empirically analyzes the relationship between economic growth and financial
development which has been an important topic for debate in the literature. Hence, the main
objective was basically to re-investigate the effect of financial development on economic growth
in Asian countries. Specifically to understand if the results will be affected by institutional
quality. To this end, estimation techniques which includes OLS, Random and Fixed Effects
applied on a dynamic panel data for a sample of 41 Asian countries over the period 2005-2014.
These countries have been through a long period of struggle and hence it faced a weak economic
structure in the beginning. It took some time for it to reform its administration governing
structure by transitioning itself, while others have seen lesser but still clear changes in their
economic and legal institutions. In this paper, the effects of these institutional changes have been
discussed rigorously. In order to achieve high-quality institutions, countries would need to go
through a phase of institutional change and instability and it takes time to evolve.
According to the model, the empirical results basically demonstrated financial development in
terms of stock market and banking sector. It exhibits causal relationship between financial
development and economic growth. The institutional quality was able to alleviate the negative
effect of financial development which are indicated in banking sector and stock market and
would promote economic growth only with a sound institutional environment. The results
acclaimed that in the banking sector, credit to the private sector, liquid liabilities, bank assets and
bank index are in many specifications negatively associated with growth, meaning that there are
difficulties of credit allocation in these countries. It might be due to weak financial regulation
and supervision as the threshold of institutional quality in this region is overall quite low. On the
stock market side, the results seem to indicate that market capitalization, stocks traded, stocks
turnover and market index have positively significant especially in the case when the threshold
of institutional quality is low in the region. Inflation has a negative significant effect on
economic growth while government consumption and trade are able to promote future economic
growth which can be either in the form of domestic or foreign investment.
Hence, these results reflect in order to gain benefit from financial development, Asian countries
will have to build a transparent institutional system that would not only reduce investment risks
but a friendly business environment that will help in building investor confidence to attract

foreign investors to boost economic growth. A certain policy should be formed that is able to
rank the quality of business environment in the economy and compare it with a certain
benchmark results of developed countries. (Plekhanov, 2014)
This paper is an empirical causal relationship between institutional quality in financial
development on economic growth. The data for banking, stock market and other controlled
variable is collected from World Development Indicators while institutional quality from
Worldwide Governance Indicator. A panel study on a sample of 41 Asian countries over the
period 2005-2014 is empirically estimated. The results displays that institutional quality and
stock market have a positive significant whereas banking sector has negatively significant effect
on economic growth. A strong institutional framework was able to alleviate the negative effect on
economic growth.