Optimal Organization of Financial Intermediaries

37 Pages Posted: 4 Aug 2015

See all articles by Spiros Bougheas

Spiros Bougheas

University of Nottingham - School of Economics

Tianxi Wang

University of Essex - Department of Economics

Date Written: July 31, 2015

Abstract

This paper provides a unified framework for endogenizing two distinct organizational structures of financial intermediation. In one structure, called Bank, the intermediary is financed by issuing debt contracts to investors, and thus resembles commercial banks. In the other structure, called Fund, the intermediary is financed by issuing equity contracts to investors, thus resembling private-equity funds. The paper finds that in the former incentives can be provided in a less costly way, but the latter is more robust to negative shocks on the asset side. Our model predicts that relative to banks, private equity funds are more involved in the running of the firms that they finance, contribute more to the success of these firms, and provide funds to higher-risk, higher-return firms.

Keywords: financial intermediation, bank, equity funds

JEL Classification: D860, G000

Suggested Citation

Bougheas, Spiros and Wang, Tianxi, Optimal Organization of Financial Intermediaries (July 31, 2015). CESifo Working Paper Series No. 5452. Available at SSRN: https://ssrn.com/abstract=2639084

Spiros Bougheas (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Tianxi Wang

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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