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Bank Finance versus Bond Finance

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  • FIORELLA DE FIORE
  • HARALD UHLIG

Abstract

We present a dynamic general equilibrium model with agency costs where: i) firms are heterogeneous in the risk of default; ii) they can choose to raise finance through bank loans or corporate bonds; and iii) banks are more efficient than the market in resolving informational problems. The model is used to analyze some major long-run differences in corporate finance between the US and the euro area. We suggest an explanation of those differences based on information availability. Our model replicates the data when the euro area is characterized by limited availability of public information about corporate credit risk relative to the US, and when european firms value more than US firms the flexibility and information acquisition role provided by banks.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00429.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): 7 (October)
Pages: 1399-1421

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:7:p:1399-1421

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Mitchell Berlin & Loretta J. Mester, 1990. "Debt covenants and renegotiation," Working Papers 90-21, Federal Reserve Bank of Philadelphia.
  2. Emery, Kenneth M. & Cantor, Richard, 2005. "Relative default rates on corporate loans and bonds," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1575-1584, June.
  3. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  4. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  5. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  6. Vladimir Yankov & Egon Zakrajsek & Simon Gilchrist, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," 2009 Meeting Papers 514, Society for Economic Dynamics.
  7. Bartram, Sohnke M. & Brown, Gregory & Stulz, Rene M., 2009. "Why Do Foreign Firms Have Less Idiosyncratic Risk Than U.S. Firms?," Working Paper Series 2009-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  8. Denis, David J. & Mihov, Vassil T., 2003. "The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings," Journal of Financial Economics, Elsevier, vol. 70(1), pages 3-28, October.
  9. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
  10. Oliver E. Williamson, 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 171-195, Summer.
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Cited by:
  1. Wolf, Holger, 2011. "Relationship-based and arms-length financial systems -- a European perspective," Policy Research Working Paper Series 5833, The World Bank.
  2. Giovanni Melina & Stefania Villa, 2013. "Fiscal Policy and Lending Relationships," IMF Working Papers 13/141, International Monetary Fund.
  3. Verona, Fabio & Martins, Manuel M. F. & Drumond, Inês, 2012. "(Un)anticipated monetary policy in a DSGE model with a shadow banking system," IMFS Working Paper Series 56, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  4. Russ, Katheryn N. & Valderrama, Diego, 2012. "A theory of bank versus bond finance and intra-industry reallocation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 652-673.
  5. Zheng Liu & Jianjun Miao & Tao Zha, 2013. "Land prices and unemployment," Working Paper Series 2013-22, Federal Reserve Bank of San Francisco.
  6. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2013. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 159 - 214.
  7. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2012. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9," NBER Working Papers 18335, National Bureau of Economic Research, Inc.
  8. Dewachter, Hans & Wouters, Raf, 2014. "Endogenous risk in a DSGE model with capital-constrained financial intermediaries," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 241-268.
  9. Giovanni Melina & Stefania Villa, 2014. "Leaning Against Windy Bank Lending," BCAM Working Papers 1402, Birkbeck Centre for Applied Macroeconomics.
  10. Harald Uhlig & Fiorella De Fiore, 2012. "Corporate Debt Structure and the Financial Crisis," 2012 Meeting Papers 429, Society for Economic Dynamics.
  11. Silvio Contessi & Li Li & Katheryn Russ, 2013. "Bank vs. bond financing over the business cycle," Economic Synopses, Federal Reserve Bank of St. Louis.

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