Working Paper: NBER ID: w16979
Authors: Fiorella De Fiore; Harald Uhlig
Abstract: 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.
Keywords: corporate finance; bank loans; bond financing; informational asymmetries; dynamic general equilibrium model
JEL Codes: C68; E20; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High default risk (G33) | Abstain from production (D20) |
| Low default risk (G33) | Choose bond financing (H74) |
| Intermediate risk (G22) | Choose bank loans for flexibility and information (G21) |
| Banks' ability to acquire costly information about firms' productivity shocks (G21) | Choose bank loans for flexibility and information (G21) |
| Higher credit quality (G32) | Use public debt (H63) |
| Lower credit quality (G32) | Prefer bank loans (G21) |