Abstract

http://ssrn.com/abstract=959188
 
 

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Economic Development and Relationship-Based Financing


Mariassunta Giannetti


Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Xiaoyun Yu


Indiana University - Kelley School of Business - Department of Finance; China Academy of Financial Research (CAFR)

July 1, 2014

ECGI - Finance Working Paper No. 153/2007
AFA 2009 San Francisco Meetings Paper

Abstract:     
Formal finance involves costly information acquisition about distant entrepreneurs, while relationship-based finance allows financiers to fund a narrow circle of close entrepreneurs at no cost. We show that in developing economies with low capital endowments, relationship-based finance is optimal because only high-quality entrepreneurs receive funding. In economies with higher capital endowments, formal finance becomes necessary to prevent low-quality entrepreneurs from being funded. However, there are equilibria in which formal finance and wasteful information acquisition emerge despite relationship-based finance being optimal. Also, in developed economies, relationship-based finance may persist and low-quality close entrepreneurs may be funded instead of high-quality distant entrepreneurs.

Number of Pages in PDF File: 54

Keywords: Finance and growth, Information acquisition, Competition for capital, Connection-based vs.arm's length financial systems

JEL Classification: G3, O16

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Date posted: March 17, 2008 ; Last revised: July 2, 2014

Suggested Citation

Giannetti, Mariassunta and Yu, Xiaoyun, Economic Development and Relationship-Based Financing (July 1, 2014). ECGI - Finance Working Paper No. 153/2007; AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=959188 or http://dx.doi.org/10.2139/ssrn.959188

Contact Information

Mariassunta Giannetti (Contact Author)
Stockholm School of Economics ( email )
P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)
HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm
Sweden

Xiaoyun Yu
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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