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Banking Development, Corporate Governance and Growth

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Abstract

We investigate the interaction between banking development and corporate governance in a dynamic economy where banks facilitate firm entry and monitor managerial moral hazard over the course of credit relationships. We show that these roles of banks can generate different consequences for firms’ investment and growth. Positive shocks to banks’ monitoring efficiency boost incumbents’ investment and growth in both the short and long run. Improvements in banks’ efficiency at facilitating firm entry can instead exacerbate managers’ incentives to divert resources outside firms, depressing investment and growth. The quantitative analysis reveals that, when corporate governance is imperfect, banking development can induce a hump-shaped response of output growth and welfare. The predictions are consistent with evidence from the Italian corporate and banking sectors.

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  • Emanuele Brancati & Paolo E. Giordani & Maurizio Iacopetta & Raoul Minetti, 2025. "Banking Development, Corporate Governance and Growth," CEIS Research Paper 595, Tor Vergata University, CEIS, revised 10 Feb 2026.
    • Handle: RePEc:rtv:ceisrp:595
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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