Contractual Savings, Capital Markets, and Firms' Financing Choices

65 Pages Posted: 20 Apr 2016

See all articles by Gregorio Impavido

Gregorio Impavido

International Monetary Fund (IMF); World Bank

Alberto R. Musalem

World Bank

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Date Written: March 2001

Abstract

Contractual savings institutions, such as pension funds and life insurance companies, have a comparative advantage in supplying long-term finance to firms. In market-based economies, an increase in the proportion of shares in the contractual savings portfolio leads to a decline in firms' leverage. In bank-based economies, in contrast, it is associated with an increase in firms' leverage and debt maturity. Impavido, Musalem, and Tressel analyze the relationship between the development and asset allocation of contractual savings institutions (such as pension funds and life insurance companies) and firms' financing patterns.

Contractual savings institutions have a comparative advantage in supplying long-term finance to firms. In market-based economies, an increase in the proportion of shares in the contractual savings portfolio leads to a decline in firms' leverage. In bank-based economies, in contrast, it is associated with an increase in firms' leverage and debt maturity.

Impavido, Musalem, and Tressel develop a simple model of firms' leverage and debt maturity decisions. They illustrate the mechanisms through which the development of contractual savings institutions may affect corporate financing patterns.

Empirically, they show that the development and asset allocation of contractual savings institutions have an independent impact on firms' financing choices, after controlling for firms' characteristics, for macroeconomic variables, and for traditional measures of financial development. The development of contractual savings institutions leads to an efficiency gain at the firm level insofar as it increases the array of firms' external financing possibilities. Moreover, increasing the maturity of debt or decreasing leverage should increase firms' resilience in the face of various shocks (and therefore decrease the refinancing and bankruptcy risks).

The impact on firms' financing patterns works through several channels. In market-based economies, the effect seems to work through the stock market and equity finance. In bank-based economies, it seems to work through the loan supply. More analysis is needed to identify the channels through which contractual savings institutions interact with the financial system.

Regulations aimed at strengthening corporate governance are more likely to have a strong impact in market-based economies. In bank-based economies, the emphasis should be on the interaction with the banking sector.

This paper - a product of the Financial Sector Development Department - is part of a larger effort in the department to study the effects of contractual savings on financial markets.

Suggested Citation

Impavido, Gregorio and Musalem, Alberto R. and Tressel, Thierry, Contractual Savings, Capital Markets, and Firms' Financing Choices (March 2001). World Bank Policy Research Working Paper No. 2612. Available at SSRN: https://ssrn.com/abstract=632681

Gregorio Impavido (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.imf.org

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Alberto R. Musalem

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Thierry Tressel

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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