Working Paper: NBER ID: w13405
Authors: Thomas Philippon
Abstract: The share of finance in U.S. GDP has been multiplied by more than three over the postwar period. I argue, using evidence and theory, that corporate finance is a key factor behind this evolution. Inside the finance industry, credit intermediation and corporate finance are more important than globalization, increased trading, or the development of mutual funds for explaining the trend. In the non financial sector, firms with low cash flows account for a growing share of total investment. I build a simple equilibrium model to capture these salient features and I use it to interpret the data. I find that corporate demand is the main contributor to the growth of the finance industry, but also that efficiency gains in finance have been important to limit credit rationing. Overall, the model can account for a bit more than half of the financial sector's growth.
Keywords: Corporate Finance; Financial Sector; US Economy; Credit Intermediation; Investment
JEL Codes: E2; G2; G3; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate finance demand (G39) | growth of the finance industry (O16) |
| efficiency gains in finance (G29) | limitation of credit rationing (E51) |
| corporate finance demand + efficiency gains in finance (G39) | growth of the finance industry (O16) |
| corporate finance dynamics (G39) | broader economic outcomes (F69) |
| corporate finance demand (G39) | demand for financial services (G20) |
| observed trends in cash flows and investments (G31) | evolving landscape of corporate finance (G39) |