Banks as Better Monitors and Firms' Financing Choices in Dynamic General Equilibrium
AbstractThis paper builds a dynamic general equilibrium model that emphasizes banks' comparative advantage in monitoring financial distress in order to explain firms' choice between bank loans and market debt. Banks can deal with financial distress more cheaply than bond holders, but this requires a higher initial expenditure proportional to the loan size. In contrast, bond issues may involve a small fixed cost. Entrepreneurs' choice of bank or bond financing depends on their net worth. The steady state of the model can explain why smaller firms tend to use more bank financing and why bank financing is more prevalent in Europe than in the US. A higher fixed cost of issuing market debt is a key factor in replicating the higher use of bank financing relative to market debt in Europe. Finally, we find that for plausible calibrations one can predict aggregate quantities just as well using a model with only one type of loan with costs of financial distress that are an average of the costs for bank loans and market debt.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 23958.
Date of creation: 10 May 2008
Date of revision: 01 Jun 2010
financial frictions; costly state verification; financial distress;
Find related papers by JEL classification:
- G3 - Financial Economics - - Corporate Finance and Governance
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fisher, Jonas D M, 1999.
"Credit Market Imperfections and the Heterogeneous Response of Firms to Monetary Shocks,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 31(2), pages 187-211, May.
- Jonas D.M. Fisher, 1998. "Credit market imperfections and the heterogeneous response of firms to monetary shocks," Working Paper Series, Macroeconomic Issues 96-23, Federal Reserve Bank of Chicago.
- Marco Cagetti & Mariacristina De Nardi, 2005.
"Entrepreneurship, frictions, and wealth,"
Working Paper Series
WP-05-09, Federal Reserve Bank of Chicago.
- Shleifer, Andrei & McLiesh, Caralee & Hart, Oliver & Djankov, Simeon, 2008.
"Debt Enforcement Around the World,"
2961825, Harvard University Department of Economics.
- Sylvain Champonnois, 2006.
"Comparing Financial Systems: A structural Analysis,"
2006 Meeting Papers
520, Society for Economic Dynamics.
- Champonnois, Sylvain, 2006. "Comparing financial systems: a structural analysis," Working Paper Series 0702, European Central Bank.
- Andrés Erosa, 2000.
"Financial Intermediation and Occupational Choice in Development,"
UWO Department of Economics Working Papers
20003, University of Western Ontario, Department of Economics.
- Andres Erosa, 2001. "Financial Intermediation and Occupational Choice in Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 303-334, April.
- Francisco Covas & Wouter J. Den Haan, 2012.
"The Role of Debt and Equity Finance Over the Business Cycle,"
Royal Economic Society, vol. 122(565), pages 1262-1286, December.
- Francisco Covas & Wouter J. den Haan, 2006. "The Role of Debt and Equity Finance over the Business Cycle," Working Papers 06-45, Bank of Canada.
- Covas, Francisco & Den Haan, Wouter, 2007. "The Role of Debt and Equity Finance over the Business Cycle," CEPR Discussion Papers 6145, C.E.P.R. Discussion Papers.
- Francisco Covas & Wouter Denhaan, 2006. "The role of debt and equity finance over the business cycle," 2006 Meeting Papers 407, Society for Economic Dynamics.
- Diego Restuccia & Richard Rogerson, 2008.
"Policy Distortions and Aggregate Productivity with Heterogeneous Plants,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
- Diego Restuccia & Richard Rogerson, 2007. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," NBER Working Papers 13018, National Bureau of Economic Research, Inc.
- Diego Restuccia & Richard Rogerson, 2007. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Working Papers tecipa-283, University of Toronto, Department of Economics.
- Richard Rogerson & Diego Restuccia, 2004. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," 2004 Meeting Papers 69, Society for Economic Dynamics.
- Diego Restuccia & Richard Rogerson, 2008. "Code for "Policy Distortions and Aggregate Productivity with Heterogeneous Plants"," Computer Codes 07-48, Review of Economic Dynamics.
- Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
- Hubbard, R Glenn & Kuttner, Kenneth N & Palia, Darius N, 2002.
"Are There Bank Effects in Borrowers' Costs of Funds? Evidence from a Matched Sample of Borrowers and Banks,"
The Journal of Business,
University of Chicago Press, vol. 75(4), pages 559-81, October.
- R. Glenn Hubbard & Kenneth N. Kuttner & Darius N. Palia, 1999. "Are there "bank effects" in borrowers' costs of funds? Evidence from a matched sample of borrowers and banks," Staff Reports 78, Federal Reserve Bank of New York.
- Hans Gersbach & Harald Uhlig, 2007.
"On the Coexistence of Banks and Markets,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 109(2), pages 225-243, 06.
- Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
98-03, C.V. Starr Center for Applied Economics, New York University.
- 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.
- 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.
- Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, 08.
- Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
- Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 2000.
"Identifying the macroeconomic effect of loan supply shocks,"
00-2, Federal Reserve Bank of Boston.
- Peek, Joe & Rosengren, Eric S & Tootell, Geoffrey M B, 2003. " Identifying the Macroeconomic Effect of Loan Supply Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 931-46, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.