Customer Friendly Finance
35 Pages Posted: 1 Apr 2016
Date Written: March 28, 2016
In the United States, customer owned firms are responsible for 35% of consumer insurance and 10% of consumer banking, yet receive little theoretical or empirical attention. In this paper, I propose a theory of internal finance for the customer owned firm. I show that its growth, pricing, and capital structure are tied together: higher sales tomorrow are achieved through higher prices today and lower leverage today. This result does not hold for a shareholder owned firm. I document stylized facts from the credit union industry and find that they are consistent with the theory's predictions. I discuss empirical implications for other customer owned firms, such as mutual insurance companies and agricultural credit associations.
Keywords: Internal Finance, Consumer Cooperatives, Financial Institutions
JEL Classification: G21, G22, G30, G32, L12, L21
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