The Effect of Political Factors on Financial Development: An Analysis of Less Developed and Developing Countries

The aim of this study is to investigate the effects of political decision-making process and political actors on financial development. The impact of political factors was investigated in 48 underdeveloped and developing countries employing dynamic panel data analysis for 1985-2012 period, using nine explanatory variables grouped under two subheadings: ‘the political system and parliamentary structure’ and ‘the political stability’. The results show that the level of democratization has significant inverse U-shaped effect on financial development. While the higher government votes increase the financial development, but coalition governments affect adversely. Institutions and rules that limit the powers of the executive have no significant effect on financial development. With regard to variables representing political stability, the results show that political crises, the frequency of cabinet changes, legislative elections and political corruption limit the financial development, while there is no significant effect of the government's term of office