guages (Hall & Jones 1999) (for institutional quality),<sup>8</sup> and embed them in the system GMM framework as additional exogenous instruments.

Table 3: Regressions for fixed investment with exogenous instruments, unbalanced 5-year average panel, 1980–2009<sup>_†_</sup>

||**E1**|**E5**|**E2**|**E6**|**E3**|**E7**|
|---|---|---|---|---|---|---|
|Financial|-0.297|-0.131|-0.042|0.292|-0.202|-0.185|
|development|(0.26)|(0.39)|(0.27)|(0.15)<sup>_∗∗_</sup>|(0.23)|(0.20)|
|Institutional|0.461|0.453|0.368|0.256|0.266|0.201|
|quality|(0.19)<sup>_∗∗_</sup>|(0.23)<sup>_∗∗_</sup>|(0.20)<sup>_∗_</sup>|(0.33)|(0.13)<sup>_∗∗_</sup>|(0.08)<sup>_∗∗_</sup>|
|Economic controls|Yes|Yes|Yes|Yes|Yes|Yes|
|Structural controls|No|Yes|No|Yes|No|Yes|
|Wald _χ_<sup>2</sup>|17,411<sup>_∗∗∗_</sup>|5,766<sup>_∗∗∗_</sup>|18,052<sup>_∗∗∗_</sup>|9,832<sup>_∗∗∗_</sup>|8,422<sup>_∗∗∗_</sup>|16,822<sup>_∗∗∗_</sup>|
|Hansen _J_|38.280|33.215|35.482|28.811|36.237|39.364|
|AR(2) _z_|-1.446|-1.339|-1.286|-1.457|-1.536|-1.481|
|Instruments|42|41|41|41|41|43|
|External?|Both|Both|IQ only|IQ only|FD only|FD only|
|N (countries)|408 (106)|337 (105)|403 (106)|333 (105)|337 (105)|337 (105)|

> _†_ All variables are in log form. Heteroskedasticity and autocorrelation-robust standard errors are reported in parentheses. All variables are in log form. Heteroskedasticity and autocorrelation-robust standard errors are reported in parentheses. Period fixed effects, a constant term, and economic (all specifications) and additional structural controls (E2, E4, E6) were included in the regressions, but not reported. IQ = institutional quality, FD = financial development.<sup>_∗_</sup> indicates significance at 10 percent level,<sup>_∗∗_</sup> indicates significance at 5 percent level, and<sup>_∗∗∗_</sup> indicates significance at 1 percent level.

The results can be found in Table 3, both without (columns (E1)–(E3)) and with (columns (E5)–(E7)) additional institutional and structural controls (so that they are analogous to to specifications (B4) and (B6), respectively). To better understand the sensitivity of the results to the use of internal instruments, the first two columns (E1/E5)<sup>9</sup> include both external instruments, while the next two (E2/E6) take the (external) institutional quality instrument seriously by using _only_ the language share instruments alongside lagged financial development (as internal instruments) in the exogenous instrument matrix. The final two columns (E3/E7) treat the external financial development instrument seriously by using only legal origins alongside lagged institutional quality in the exogenous instrument matrix.

Taken together, these results convey a consistent message: Conditional on the external instruments being valid, institutional quality is more likely to have a causal impact on investment, as opposed to financial development. Institutional quality retains its positive and significant coefficient in virtually all specifications, while financial development is only significant in one specification (E6), which relies on the internal instruments for financial development. Although the relatively weak result for financial development does not necessarily negate the possibility

> 8An alternative (and somewhat popular) instrument for institutions is settler mortality (Acemo ̆glu, Johnson & Robinson 2001). For the sake of parsimony, we report results using this instrument—which are similar to the language share instrument—in the annex.

> 9The nonconsecutive numbering of the columns is to allow correspondence with the full results, which are provided in the annex.

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