A Theory of Banks, Bonds, and the Distribution of Firm Size

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe draw on stylized facts from the finance literature to build a model where altering the relative costs of bank and bond financing changes the entire distribution of firm size, with implications for the aggregate capital stock, output, and welfare. Reducing transactions costs in the bond market increases the output and profits of mid-sized firms at the expense of both the largest and smallest firms. In contrast, reducing the frictions involved in bank lending promotes the expansion of the smallest firms while all other firms shrink, even as it increases the profitability of both small and mid-size firms. Although both policies increase aggregate output and welfare, they have opposite effects on the extensive margin of production-promoting bond issuance causes exit while cheaper bank credit induces entry. When reducing transactions costs in one market, the resulting increase in output and welfare are largest when transactions costs in the other market are very high.

Financial Choice in a Non-Ricardian Model of Trade

“…See Appendix A for derivation.12 This forced exit shock is drawn fromMelitz (2003) and is equal to the net exit rate in steady state. The exit rate involving plant closings inDunne, Roberts, and Samuelson (1988) (8.7-17.3 percent for new plants, 1.1-2.2 percent for established plants) is similar to the default rates surveyed byRuss and Valderrama (2009).13 See Appendix A for derivation.…”

“…Relating the tradeoffs between banking sector and bond market development with trade flows in a heterogeneous firm framework crosses several segments of literature. There is a deep foundation of theoretical and empirical work analyzing the choice between banks and bonds in the closed economy, which several sources survey in detail (Freixas and Rochet, 1997;De Fiore and Uhlig, 2005;Russ and Valderrama, 2009). However, our motivating question-How does financial choice impact welfare in an open economy?-arises from piecing together a diverse patchwork of studies relating individual financial frictions to the pattern of trade and another very small but growing branch of literature focusing on the impacts of firms' choice between sources of financing on macroeconomic outcomes in open economies.…”

“…For the calibration of the financial friction parameters we follow Russ and Valderrama (2009) who discuss estimates of f b , f l , µ, and δ. We vary f b from a level twice as large as f l , which after 48 months of recovery effort, which is quite close to the lowest value recorded for the U.S. on structured loans, 0.13.…”

“…4 See Russ and Valderrama (2009) for a survey of the theory and evidence surrounding bank and bond financing that produced this stylized fact regarding sources of financing for small versus large firms.…”

“…The sufficient condition for this marginal domestic producer to be a bank borrower requires only that the domestic profit equation be steeper for a bond issuer than for a bank borrower and that the domestic profit functions of the two are equal where profits are greater than zero. SeeRuss and Valderrama (2009) for a detailed discussion.…”