Institutional Quality, Financial Development, and Capital Flight

This paper uses a dataset on 97 developing and emerging economies during the 1980-2004 period to explore the link between institutional quality and capital flight. The results suggest that countries with better institutions experience less capital flight. Unlike the previous studies, we also investigate the extent to which the impact of institutional quality on capital flight is moderated by the level of financial development in the source country. Our findings indicate that institutions compensate for the lack of well developed financial systems and thus have a moderating effect on capital flight in countries with weak financial systems.