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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 heterogeneous firms choose among two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.

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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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  1. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  3. 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.
  4. 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.
  5. 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.
  6. Berlin, Mitchell & Mester, Loretta J., 1992. "Debt covenants and renegotiation," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 95-133, June.
  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. 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.
  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. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
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Cited by:
  1. In't Veld, Jan & Raciborski, Rafal & Ratto, Marco & Roeger, Werner, 2011. "The recent boom-bust cycle: The relative contribution of capital flows, credit supply and asset bubbles," European Economic Review, Elsevier, vol. 55(3), pages 386-406, April.
  2. Dewachter, Hans & Wouters, Raf, 2012. "Endogenous risk in a DSGE model with capital-constrained financial intermediaries," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/396280, Katholieke Universiteit Leuven.
  3. Hans Dewachter & Raf Wouters, 2012. "Endogenous risk in a DSGE model with capital-constrained financial intermediaries," Working Paper Research 235, National Bank of Belgium.
  4. Harald Uhlig & Fiorella De Fiore, 2012. "Corporate Debt Structure and the Financial Crisis," 2012 Meeting Papers 429, Society for Economic Dynamics.
  5. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2012. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27 National Bureau of Economic Research, Inc.
  6. Wolf, Holger, 2011. "Relationship-based and arms-length financial systems -- a European perspective," Policy Research Working Paper Series 5833, The World Bank.

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