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Bank Finance versus Bond Finance

  • FIORELLA DE FIORE
  • HARALD UHLIG

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00429.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): 7 (October)
Pages: 1399-1421

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:7:p:1399-1421
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Chemmanur, T.J. & Fulghieri, P., 1992. "Reputation, Renegotiation, and the Choice Between Bank Loans and Publicity Traded Debt," Papers 92-24, Columbia - Graduate School of Business.
  2. Mitchell Berlin & Loretta J. Mester, 1992. "Debt covenants and renegotiation," Working Papers 92-9, Federal Reserve Bank of Philadelphia.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  4. 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.
  5. Bartram, Sohnke M. & Brown, Gregory & Stulz, Rene M., 2009. "Why Do Foreign Firms Have Less Idiosyncratic Risk Than U.S. Firms?," Working Paper Series 2009-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  6. Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 471-493, May.
  7. Denis, David J. & Mihov, Vassil T., 2003. "The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings," Journal of Financial Economics, Elsevier, vol. 70(1), pages 3-28, October.
  8. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  9. Oliver E. Williamson, 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 171-195, Summer.
  10. Emery, Kenneth M. & Cantor, Richard, 2005. "Relative default rates on corporate loans and bonds," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1575-1584, June.
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