IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Corporate Governance Institutions, Investment, and the Macroeconomy

  • Antonio Falato

This 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

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.columbia.edu/~af281/governance_afalato.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Christian Zimmermann)


File Function: main text
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 131.

as
in new window

Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:131
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed004:131. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.