Corporate Governance Institutions, Investment, and the Macroeconomy
Antonio Falato (antonio.falato@frb.gov)
No 131, 2004 Meeting Papers from Society for Economic Dynamics
Abstract:
This paper evaluates quantitatively the macroeconomic implications of corporate governance institutions within a model where the size and distribution of firms and the structure of financial markets are jointly determined. If firms adapt their financing modes to economic conditions, aggregate shocks change the aggregate composition of financing, which, in turn, is shown to be a key determinant of firm growth and aggregate volatility. We construct a search-theoretic stochastic dynamic general equilibrium model of security design with two distinguishing features: (i) firms\92 decision to issue different types of securities, i.e. private (bank) versus public (bond) debt, is modeled explicitly as a dynamic choice between long-term imperfectly enforceable contracting regimes; (ii) bonds are an imperfect substitute for bank debt, since, while being more effective than bond holders at preventing managerial misconduct, banks face occasionally binding capital adequacy constraints imposed by prudential regulation. We derive a recursive characterization and show that bank and market lending co-exist in equilibrium. Plausibly calibrated numerical solutions reveal that capital adequacy requirements have sizable consequences for aggregate welfare. At the micro level, the model is consistent with the stylized fact that larger firms have a bigger share of securities in their financial structure (e.g. Petersen and Rajan, 1994). At the macro level, the model is consistent with key regularities of financial systems and the business cycle. Most notably, it implies that aggregate volatility is higher in market-based financial systems and bank capital plays a crucial role in the macroeconomic transmission of interest rate shocks
Keywords: Firm Dynamics; Optimal Security Design; Limited Commitment; Long-term Contracts; Bank Regulation (search for similar items in EconPapers)
JEL-codes: E22 E44 G31 G32 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-acc, nep-dge, nep-mac and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:131
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