NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bank Finance Versus Bond Finance

Fiorella De Fiore, Harald Uhlig

NBER Working Paper No. 16979
Issued in April 2011
NBER Program(s):   EFG   CF   ME

We present a dynamic general equilibrium model with agency costs where: i) firms are heterogeneous in the risk of default; ii) they can choose to raise finance through bank loans or corporate bonds; and iii) banks are more efficient than the market in resolving informational problems. The model is used to analyze some major long-run differences in corporate finance between the US and the euro area. We suggest an explanation of those differences based on information availability. Our model replicates the data when the euro area is characterized by limited availability of public information about corporate credit risk relative to the US, and when european firms value more than US firms the flexibility and information acquisition role provided by banks.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w16979

Published: Fiorella De Fiore & Harald Uhlig, 2011. "Bank Finance versus Bond Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1399-1421, October. citation courtesy of

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