Using a sample of former colonies, this paper assesses two theories regarding the historical determinants of financial development. The law and finance theory holds that legal traditions, brought by colonizers, differ in terms of protecting the rights of private investors vis-à-vis the state, with important implications for financial development. The endowment theory argues that the disease environment encountered by colonizers influences the formation of long-lasting institutions. The empirical results provide evidence for both theories. However, initial endowments are more robustly associated with financial intermediary development and explain more of the cross-country variation in financial intermediary and stock market development.

Universe: 70 former colonies