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Bank Finance versus Bond Finance: What Explains the Differences Between the US and Europe?

  • De Fiore, Fiorella
  • Uhlig, Harald

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose between 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5213.

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Date of creation: Sep 2005
Date of revision:
Handle: RePEc:cpr:ceprdp:5213
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  1. Michael Ehrmann & Leonardo Gambacorta & Jorge Martínez-Pagés & Patrick Sevestre & Andreas Worms, 2001. "Financial Systems and the Role of Banks in Monetary Policy Transmission in the Euro Area," Banco de Espa�a Working Papers 0118, Banco de Espa�a.
  2. 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.
  3. Masulis, Ronald W, 1983. " The Impact of Capital Structure Change on Firm Value: Some Estimates," Journal of Finance, American Finance Association, vol. 38(1), pages 107-26, March.
  4. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  5. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," NBER Working Papers 10255, National Bureau of Economic Research, Inc.
  6. 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.
  7. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28.
  8. Mark S. Carey & Gregory P. Nini, 2004. "Is the corporate loan market globally integrated? a pricing puzzle," International Finance Discussion Papers 813, Board of Governors of the Federal Reserve System (U.S.).
  9. William B. English & William R. Nelson, 1998. "Bank risk rating of business loans," Finance and Economics Discussion Series 1998-51, Board of Governors of the Federal Reserve System (U.S.).
  10. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Monetary shocks, agency costs, and business cycles," Working Paper 0011, Federal Reserve Bank of Cleveland.
  11. Ester Faia, 2004. "Monetary policy in a world with different financial systems," Money Macro and Finance (MMF) Research Group Conference 2003 28, Money Macro and Finance Research Group.
  12. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, vol. 39(1), pages 45-69, September.
  13. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  14. 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.
  15. João A. C. Santos & Kostas Tsatsaronis, 2003. "The cost of barriers to entry: evidence from the market for corporate euro bond underwriting," BIS Working Papers 134, Bank for International Settlements.
  16. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
  17. Angeloni, Ignazio & Ehrmann, Michael, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 0240, European Central Bank.
  18. Mojon, Benoît & Angeloni, Ignazio & Terlizzese, Daniele & Kashyap, Anil K., 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and U.S," Working Paper Series 0268, European Central Bank.
  19. repec:oup:qjecon:v:112:y:1997:i:3:p:663-91 is not listed on IDEAS
  20. repec:oup:restud:v:52:y:1985:i:4:p:647-63 is not listed on IDEAS
  21. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
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