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Why Has the U.S. Financial Sector Grown so Much? The Role of Corporate Finance

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  • Thomas Philippon

Abstract

The share of finance in U.S. GDP has been multiplied by more than three over the postwar period. I argue, using evidence and theory, that corporate finance is a key factor behind this evolution. Inside the finance industry, credit intermediation and corporate finance are more important than globalization, increased trading, or the development of mutual funds for explaining the trend. In the non financial sector, firms with low cash flows account for a growing share of total investment. I build a simple equilibrium model to capture these salient features and I use it to interpret the data. I find that corporate demand is the main contributor to the growth of the finance industry, but also that efficiency gains in finance have been important to limit credit rationing. Overall, the model can account for a bit more than half of the financial sector's growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13405.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13405

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Cited by:
  1. Jennie Bai, 2012. "Have Financial Markets Become More Informative?," 2012 Meeting Papers 1193, Society for Economic Dynamics.
  2. Armijo, Leslie Elliott & Mühlich, Laurissa & Tirone, Daniel C., 2014. "The systemic financial importance of emerging powers," Journal of Policy Modeling, Elsevier, vol. 36(S1), pages S67-S88.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  4. Jennie Bai & Thomas Philippon & Alexi Savov, 2012. "Have financial markets become more informative?," Staff Reports 578, Federal Reserve Bank of New York.
  5. Thomas Philippon, 2012. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," NBER Working Papers 18077, National Bureau of Economic Research, Inc.
  6. Thomas Philippon, 2007. "Financiers vs. Engineers: Should the Financial Sector be Taxed or Subsidized?," NBER Working Papers 13560, National Bureau of Economic Research, Inc.

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