Bank Finance Versus Bond Finance

40 Pages Posted: 25 Apr 2011 Last revised: 14 Jun 2011

See all articles by Fiorella De Fiore

Fiorella De Fiore

Bank for International Settlements (BIS) - Monetary and Economic Department

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2011

Abstract

We present a dynamic general equilibrium model with agency costs where: i) firms are heterogeneous in the risk of default; ii) they can choose to raise finance through bank loans or corporate bonds; and iii) banks are more efficient than the market in resolving informational problems. The model is used to analyze some major long-run differences in corporate finance between the US and the euro area. We suggest an explanation of those differences based on information availability. Our model replicates the data when the euro area is characterized by limited availability of public information about corporate credit risk relative to the US, and when european firms value more than US firms the flexibility and information acquisition role provided by banks.

Suggested Citation

De Fiore, Fiorella and Uhlig, Harald, Bank Finance Versus Bond Finance (April 2011). NBER Working Paper No. w16979, Available at SSRN: https://ssrn.com/abstract=1820091

Fiorella De Fiore (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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