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Credit Markets, Corporate Governance and Growth

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Abstract

We investigate the interaction between the banking sector and corporate governance in an economy where banks act both as monitors of managerial frictions and as facilitators of new firm creation. We find that, when banks engage in relational lending with borrowing firms, these two activities can generate different consequences for incumbent firms’ investment and growth. The calibrated general equilibrium model reveals that positive shocks to banks’ monitoring efficiency boost incumbents’ investments and growth in both the short and the long run. Increases in banks’ efficiency at entry can instead depress investment and growth by exacerbating managers’ incentives to divert resources for out-of-firm projects. Quantitative experiments indicate that banking development that increases the overall banking efficiency can induce a hump-shaped response of output growth and welfare. We test the mechanisms of the model using data from the Italian corporate and banking sector.

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  • Emanuele Brancati & Paolo E. Giordani & Maurizio Iacopetta & Raoul Minetti, 2025. "Credit Markets, Corporate Governance and Growth," CEIS Research Paper 595, Tor Vergata University, CEIS, revised 19 Mar 2025.
    • Handle: RePEc:rtv:ceisrp:595
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    1. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    2. Nicola Cetorelli & Philip E. Strahan, 2006. "Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets," Journal of Finance, American Finance Association, vol. 61(1), pages 437-461, February.
    3. Lee, Yoonsoo & Mukoyama, Toshihiko, 2015. "Entry and exit of manufacturing plants over the business cycle," European Economic Review, Elsevier, vol. 77(C), pages 20-27.
    4. Philippe Aghion & Antonin Bergeaud & Gilbert Cette & Rémy Lecat & Hélène Maghin, 2019. "Coase Lecture ‐ The Inverted‐U Relationship Between Credit Access and Productivity Growth," Economica, London School of Economics and Political Science, vol. 86(341), pages 1-31, January.
    5. Xavier Vives, 2006. "Banking and Regulation in Emerging Markets: The Role of External Discipline," The World Bank Research Observer, World Bank, vol. 21(2), pages 179-206.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banks; Corporate Governance; Investments; Entry;
    All these keywords.

    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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