Corporate Governance Institutions, Investment, and the Macroeconomy
AbstractThis paper evaluates quantitatively the macroeconomic implications of corporate governance institutions within a model where the size and distribution of firms and the structure of financial markets are jointly determined. If firms adapt their financing modes to economic conditions, aggregate shocks change the aggregate composition of financing, which, in turn, is shown to be a key determinant of firm growth and aggregate volatility. We construct a search-theoretic stochastic dynamic general equilibrium model of security design with two distinguishing features: (i) firms’ decision to issue different types of securities, i.e. private (bank) versus public (bond) debt, is modeled explicitly as a dynamic choice between long-term imperfectly enforceable contracting regimes; (ii) bonds are an imperfect substitute for bank debt, since, while being more effective than bond holders at preventing managerial misconduct, banks face occasionally binding capital adequacy constraints imposed by prudential regulation. We derive a recursive characterization and show that bank and market lending co-exist in equilibrium. Plausibly calibrated numerical solutions reveal that capital adequacy requirements have sizable consequences for aggregate welfare. At the micro level, the model is consistent with the stylized fact that larger firms have a bigger share of securities in their financial structure (e.g. Petersen and Rajan, 1994). At the macro level, the model is consistent with key regularities of financial systems and the business cycle. Most notably, it implies that aggregate volatility is higher in market-based financial systems and bank capital plays a crucial role in the macroeconomic transmission of interest rate shocks
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 131.
Date of creation: 2004
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Firm Dynamics; Optimal Security Design; Limited Commitment; Long-term Contracts; Bank Regulation;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-08-02 (Accounting & Auditing)
- NEP-ALL-2004-08-02 (All new papers)
- NEP-DGE-2004-08-02 (Dynamic General Equilibrium)
- NEP-MAC-2004-08-02 (Macroeconomics)
- NEP-REG-2004-08-02 (Regulation)
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