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Security versus Bank Finance

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Author Info
Franco Modigliani (MIT Sloan School of Management)
Enrico C. Perotti () (University of Amsterdam and CEPR)
Pieter van Oijen () (University of Amsterdam)

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Abstract

We argue that in an unreliable enforcement regime, transactions tend to become intermediated through institutions or concentrated among agents bound by some form of private enforcement. Provision of funding shifts from risk capital to debt, and from markets to institutions with long term relations.
When minority investors' rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new risky ventures. More generally, fewer firms will be financed with outside equity, resulting in a low capitalization relative to GNP and a predominance of internal (unlisted) equity and bank lending over traded securities.
We report some supporting evidence on a small set of countries on the correlation between investor protection and development of security markets. We use existing measures of investor protection and corruption, as well as a price measure, the premium on voting stock, which is related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller. The other indicators are also consistent with our hypothesis, although the sample size is limited.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 98-051/2.

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Date of creation: 20 May 1998
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Handle: RePEc:dgr:uvatin:19980051

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  2. La Porta, Rafael & Lopez-de-Silanes, Florencio & Schleifer, Andrei & Vishny, Robert, 2001. "Investor Protection and Corporate Governance," Working Paper Series rwp01-017, Harvard University, John F. Kennedy School of Government. [Downloadable!]
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  3. Andrei Shleifer & Daniel Wolfenson, 2000. "Investor Protection and Equity Markets," NBER Working Papers 7974, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Ari Hyytinen & Mika Pajarinen, 2001. "Financial Systems and Venture Capital in Nordic Countries: A comparative Study," Discussion Papers 774, The Research Institute of the Finnish Economy. [Downloadable!]
  5. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1999. "Investor Protection: Origins, Consequences, Reform," Harvard Institute of Economic Research Working Papers 1883, Harvard - Institute of Economic Research. [Downloadable!]
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  7. Beck, Thorsten & Asl Demirguc-Kunt & Maksimovic, Vojislav, 2002. "Financing patterns around the world : the role of institutions," Policy Research Working Paper Series 2905, The World Bank. [Downloadable!]
  8. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank. [Downloadable!]
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  10. S. Daske & O. Ehrhardt, . "Kursunterschiede und Renditen deutscher Stamm-und Vorzugsaktien," Sonderforschungsbereich 373 2002-5, Humboldt Universitaet Berlin.
  11. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection: Origins, Consequences, and Reform," NBER Working Papers 7428, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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