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When culture and institutions coevolve, which means that these are changing simultaneously and in the same direction, financial development is facilitated. In contrast, when institutions and the cultural background deviate from this development, their asynchronous and different direction changes may lead to a series of failed attempts to implement a modernized financial development framework. Thus, the purpose of the paper is to highlight whether the institutional and cultural backgrounds operate in a complementary or substitute way in terms of their role in financial development. An unbalanced panel dataset comprising 98 countries over the last four decades (1981–2019) is used. The empirical results indicate that both the institutional background and the cultural background positively affect financial development. Furthermore, there is a complementary relationship between the institutional background and the cultural background in terms of their role in financial development; when both sizes are at a strong level, this leads to the highest level of financial development, while when at least one or both are at a weak level, the financial development is lower. Moreover, the interaction term of the two sizes has a positive and statistically significant effect on financial development in all tests performed. Lastly, the institutional background seems to have a greater impact on the formation of the level of financial development in relation to the cultural background. To upgrade the financial development of their economies, policymakers have to realize economic policies that change the institutional background and simultaneously change the cultural background in the same direction.

Keywords: cultural background; institutions; financial development; coevolution