Bank Finance Versus Bond Finance: What Explains the Differences between Us and Europe?

54 Pages Posted: 11 Nov 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; National Bureau of Economic Research (NBER)

Date Written: November 2005

Abstract

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among 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 US 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 US 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: E20, E44, C68

Suggested Citation

De Fiore, Fiorella and Uhlig, Harald, Bank Finance Versus Bond Finance: What Explains the Differences between Us and Europe? (November 2005). ECB Working Paper No. 547, Available at SSRN: https://ssrn.com/abstract=836444 or http://dx.doi.org/10.2139/ssrn.836444

Fiorella De Fiore (Contact Author)

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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