Income disparities and financial development: Evidence from a panel firm-level analysis

Abstract

This paper explores the effects of financial development on income disparities when certain control parameters are taken into consideration. The dataset consists of 4373 manufacturing and services firms across the globe over 2011–2020. Income inequality is captured by the gap between capital and labour earnings expressed by two ratios according to firms’ total asset valuation and profitability. The explanatory variables are divided into four groups: the indicators of financial development, the ratios of firms’ growth in the markets, their level of indebtedness and institutional regulation. The results suggest that financial development exerts a significant effect on the capital-to-labour earnings ratio according to the indicators taken into consideration. Excessive debt tends to worsen this gap, while institutional regulations promoting competition play a significant role in reducing income disparities. The robustness of the results is also checked when the constituent firms are categorised according to their size and their operating region.