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Bank Finance Versus Bond Finance

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  • Fiorella Del Fiore

    (European Central Bank)

  • Harald Uhlig

    (University of Chicago)

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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Bibliographic Info

Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2011-004.

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Date of creation: 2011
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Handle: RePEc:bfi:wpaper:2011-004

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Keywords: financial structure; agency costs; heterogeneity;

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References

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  1. 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.
  2. 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.
  3. 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.
  4. Mitchell Berlin & Loretta J. Mester, 1992. "Debt covenants and renegotiation," Working Papers 92-9, Federal Reserve Bank of Philadelphia.
  5. 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.
  6. Chemmanur, T.J. & Fulghieri, P., 1992. "Reputation, Renegotiation, and the Choice Between Bank Loans and Publicity Traded Debt," Papers 92-24, Columbia - Graduate School of Business.
  7. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  8. 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.
  9. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  10. 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.
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Cited by:
  1. Giovanni Melina & Stefania Villa, 2013. "Fiscal Policy and Lending Relationships," IMF Working Papers 13/141, International Monetary Fund.
  2. 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.
  3. Wolf, Holger, 2011. "Relationship-based and arms-length financial systems -- a European perspective," Policy Research Working Paper Series 5833, The World Bank.
  4. 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.
  5. 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.
  6. Zheng Liu & Jianjun Miao & Tao Zha, 2013. "Land prices and unemployment," Working Paper Series 2013-22, Federal Reserve Bank of San Francisco.
  7. 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.
  8. Giovanni Melina & Stefania Villa, 2014. "Leaning Against Windy Bank Lending," BCAM Working Papers 1402, Birkbeck Centre for Applied Macroeconomics.
  9. 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.
  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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