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

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  • Russ, Katheryn N.
  • Valderrama, Diego

Abstract

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.

Suggested Citation

  • Russ, Katheryn N. & Valderrama, Diego, 2012. "A theory of bank versus bond finance and intra-industry reallocation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 652-673.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:3:p:652-673
    DOI: 10.1016/j.jmacro.2012.05.004
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    Cited by:

    1. Fatih Yilmaz, "undated". "VAT Treatment of Financial Institutions: Implications for the Real Economy," Working Papers 2013-30, Department of Economics, University of Calgary, revised 02 Nov 2013.
    2. Gu, Xian & Kowalewski, Oskar, 2016. "Creditor rights and the corporate bond market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 215-238.
    3. Silvio Contessi & Li Li & Katheryn N. Russ, 2013. "Bank vs. bond financing over the business cycle," Economic Synopses, Federal Reserve Bank of St. Louis.
    4. Yibin Mu & Peter Phelps & Janet Gale Stotsky, 2013. "Bond Markets in Africa," IMF Working Papers 13/12, International Monetary Fund.
    5. Gu, Xian & Kowalewski, Oskar, 2015. "Creditor rights and corporate bond market," MPRA Paper 67022, University Library of Munich, Germany.

    More about this item

    Keywords

    Bank lending; Bond finance; Heterogeneous firm;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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