Bank Finance Versus Bond Finance

Abstract

We present a model with agency costs where heterogeneous firms raise finance through either bank loans or corporate bonds, and where 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. Our explanation of those differences is based on information availability. The 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 banks' flexibility and information acquisition role.

Keywords: Financial Structure, Agency Costs, Heterogeneity

JEL Classification: E20, E44, C68