A theory of bank versus bond finance and intra-industry reallocation

Katheryn Russ and Diego Valderrama

Journal of Macroeconomics, 2012, vol. 34, issue 3, 652-673

Abstract: The purpose of this paper is to assess the impact of targeted financial development on aggregate outcomes, in particular aggregate productivity. The development of the both the bond market and the banking sector can increase aggregate productivity through intra-industry reallocation of production toward more productive firms. This positive productivity effect is expected when the most productive firms have easier access to the bond market. However, the result is surprising in the second case because reducing the frictions involved in bank lending allows the entry by firms at the lower end of the efficiency spectrum at the expense of the largest firms. The key is that the largest firms absorb market share from their competitors who switch to bank-based financing, which has higher variable but lower fixed costs.

Keywords: Bank lending; Bond finance; Heterogeneous firm (search for similar items in EconPapers)
JEL-codes: E10 F4 G32 L11 L16 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070412000559
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:3:p:652-673

DOI: 10.1016/j.jmacro.2012.05.004

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().