The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries

Voting rights were initially limited to wealthy elites providing political support for stock markets. Thefranchise expansion induces the median voter to provide political support for banking development,as this new electorate has lower financial holdings and benefits less from the riskiness and financialreturns from stock markets. Our panel data evidence covering the years 1830–1999 shows that tighterrestrictions on the voting franchise induce greater stock market development, whereas a broadervoting franchise is more conducive to the banking sector, consistent with Perotti and von Thadden(2006). The results are robust to controlling for other institutional arrangements and endogeneity.

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