This paper examines the relationship between financial markets and the efficiency of capital allocation across 65 countries. The author finds that countries with more developed financial sectors, as measured by the size of their stock and credit markets relative to GDP, exhibit better capital allocation. Specifically, these countries increase investment more in growing industries and decrease investment more in declining industries. The paper identifies three mechanisms through which financial markets improve capital allocation: (1) stock markets that impound more firm-specific information into individual stock prices, (2) declining state ownership, and (3) strong minority investor rights. These findings suggest that financial markets and institutions play a crucial role in improving the allocation of capital, which in turn contributes to economic growth. The results also highlight the importance of financial market characteristics in explaining cross-country variations in capital allocation quality.This paper examines the relationship between financial markets and the efficiency of capital allocation across 65 countries. The author finds that countries with more developed financial sectors, as measured by the size of their stock and credit markets relative to GDP, exhibit better capital allocation. Specifically, these countries increase investment more in growing industries and decrease investment more in declining industries. The paper identifies three mechanisms through which financial markets improve capital allocation: (1) stock markets that impound more firm-specific information into individual stock prices, (2) declining state ownership, and (3) strong minority investor rights. These findings suggest that financial markets and institutions play a crucial role in improving the allocation of capital, which in turn contributes to economic growth. The results also highlight the importance of financial market characteristics in explaining cross-country variations in capital allocation quality.