Bank Finance Versus Bond Finance: What Explains the Differences between the U.S. And Europe?

49 Pages Posted: 7 Oct 2005

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

Date Written: September 2005

Abstract

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose between two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the U.S. and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the U.S. is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.

Keywords: Financial structure, agency costs, heterogeneity

JEL Classification: C68, E20

Suggested Citation

De Fiore, Fiorella and Uhlig, Harald, Bank Finance Versus Bond Finance: What Explains the Differences between the U.S. And Europe? (September 2005). CEPR Discussion Paper No. 5213, Available at SSRN: https://ssrn.com/abstract=822804

Fiorella De Fiore

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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