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A theory of bank versus bond finance and intra-industry reallocation

  • Russ, Katheryn N.
  • Valderrama, Diego

The purpose of this paper is to assess the impact of targeted financial development on aggregate outcomes, in particular aggregate productivity. The development of the both the bond market and the banking sector can increase aggregate productivity through intra-industry reallocation of production toward more productive firms. This positive productivity effect is expected when the most productive firms have easier access to the bond market. However, the result is surprising in the second case because reducing the frictions involved in bank lending allows the entry by firms at the lower end of the efficiency spectrum at the expense of the largest firms. The key is that the largest firms absorb market share from their competitors who switch to bank-based financing, which has higher variable but lower fixed costs.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 3 ()
Pages: 652-673

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:3:p:652-673
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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