Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-25T15:12:16.087Z Has data issue: false hasContentIssue false
  • English
  • Français

AN EXPLANATION FOR THE DIVERSITY OF FINANCIAL STRUCTURE

Published online by Cambridge University Press:  04 September 2013

Niloy Bose  and
Rebecca Neumann
Niloy Bose*
Affiliation:
University of Wisconsin–Milwaukee
Rebecca Neumann
Affiliation:
University of Wisconsin–Milwaukee
*
Address correspondence to: Niloy Bose, Department of Economics, University of Wisconsin–Milwaukee, Milwaukee, WI 53201, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper seeks to provide a theoretical explanation for the weak association between measures of financial structure—as defined by the mixture of bank-based and market-based financial systems in an economy—and economic development. Lenders fund risky investment projects of firms by drawing up loan contracts in the presence of an informational asymmetry. An optimal contract entails the issue of debt, equity, or a mix of the two. The equilibrium choice of contract and the financial structure depend on the state of the economy, which in turn depends on the contracting regime. Based on this analysis, the paper provides a theory that can explain the wide diversity of financial structure among middle-income countries.

Keywords

Financial StructureEconomic Development
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 2 , March 2015 , pp. 270 - 287
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Altman, Edward I. (1984) A further empirical investigation of the bankruptcy cost question. Journal of Finance 39 (4), 1067–1089.Google Scholar
Azariadis, Costas and Smith, Bruce D. (1993) Adverse selection in the overlapping generation model: The case of pure exchange. Journal of Economic Theory 60 (2), 277–305.Google Scholar
Beck, Thorsten, Demirgüç-Kunt, Asli, and Levine, Ross (2009) Financial Institutions and Markets across Countries and over Time: Data and Analysis. World Bank policy research working paper 4943.Google Scholar
Bencivenga, Valerie R. and Smith, Bruce D. (1993) Some consequences of credit rationing in an endogenous growth model. Journal of Economic Dynamics and Control 17, 97–122.Google Scholar
Bencivenga, Valerie R., Smith, Bruce D., and Starr, Ross M. (1995) Transaction costs, technological choice and endogenous growth. Journal of Economic Theory 67 (1), 153–77.Google Scholar
Bhattacharya, Sudipto and Chiesa, Gabriella (1995) Proprietary information, financial intermediation, and research incentives. Journal of Financial Intermediation 4, 328–357.Google Scholar
Bolton, Patrick and Freixas, Xavier (2000) Equity, bonds and bank debt: Capital structure and financial market equilibrium under asymmetric information. Journal of Political Economy 108 (2), 324–351.Google Scholar
Boyd, John and Smith, Bruce (1996) The coevolution of the real and financial sectors in the growth process. World Bank Economic Review 10 (2), 371–396.Google Scholar
Boyd, John H. and Smith, Bruce D. (1998) The evolution of debt and equity markets in economic development. Economic Theory 12 (3), 519–560.Google Scholar
Chakraborty, Shankha and Ray, Tridip (2006) Bank-based versus market-based financial systems: A growth-theoretic analysis. Journal of Monetary Economics 53 (2), 329–350.Google Scholar
Chakraborty, Shankha and Ray, Tridip (2007) The development and structure of financial systems. Journal of Economic Dynamics and Control 31 (9), 2920–2956.Google Scholar
Chinn, Menzie and Ito, Hiro (2006) What matters for financial development? Capital controls, institutions and interactions. Journal of Development Economics 81 (1), 163–192.Google Scholar
Demirgüç-Kunt, Asli, Feyen, Erik, and Levine, Ross (2011) The Evolving Importance of Banks and Security Markets. World Bank policy research working paper 5805.Google Scholar
Demirgüç-Kunt, Asli and Levine, Ross (2001) Bank-based and market-based financial systems: Cross-country comparisons. In Demirgüç-Kunt, Asli and Levine, Ross (eds.), Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development, pp. 81–140. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Goldsmith, Raymond W. (1969) Financial Structure and Development. New Haven, CT: Yale University Press.Google Scholar
Gurley, John G. and Shaw, E.S. (1955) Financial aspects of economic development. American Economic Review 45 (4), 515–538.Google Scholar
Gurley, John G. and Shaw, Edward S. (1960) Money in a Theory of Finance. Washington, DC: Brookings Institution.Google Scholar
Henry, Peter Blair (2003) Capital account liberalization, the cost of capital, and economic growth. American Economic Review 93 (2), 91–96.CrossRefGoogle Scholar
Henry, Peter Blair (2007) Capital account liberalization: Theory, evidence, and speculation. Journal of Economic Literature 45 (4), 887–935.Google Scholar
Heston, Alan, Summers, Robert, and Aten, Bettina (2011) Penn World Table Version 7.0. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania.Google Scholar
Khan, Aubhik (2001) Financial development and economic growth. Macroeconomic Dynamics 5, 413–433.Google Scholar
Kim, E. Han and Singal, Vijay (2000) Stock market openings: Experience of emerging economies. Journal of Business 73 (1), 25–66.CrossRefGoogle Scholar
La Porta, Rafael, de Silanes, Florencio Lopez, Shleifer, Andrei, and Vishny, Robert W. (1998) Law and finance. Journal of Political Economy 106 (6), 1113–1155.CrossRefGoogle Scholar
Levine, Ross (1991) Stock markets, growth, and tax policy. Journal of Finance 46 (4), 1445–1465.Google Scholar
Levine, Ross and Zervos, Sara (1998a) Capital control liberalization and stock market development. World Development 26 (7), 1169–1183.Google Scholar
Levine, Ross and Zervos, Sara (1998b) Stock market, banks, and economic growth. American Economic Review, 88 (3), 537–558.Google Scholar
Martell, Rodolfo and Stulz, René M. (2003) Equity market liberalizations as country IPOs. American Economic Review 93 (2), 97–101.Google Scholar
Rajan, Raghuram G. (1992) Insiders and outsiders: The choice between informed and arm's-length debt. Journal of Finance 47 (4), 1367–1400.Google Scholar
Saint-Paul, Gilles (1992) Technological choice, financial markets and economic development. European Economic Review 36 (4), 763–781.CrossRefGoogle Scholar
Stulz, René (2000) Financial structure, corporate finance, and economic growth. International Review of Finance 1, 11–38.Google Scholar
Titman, Sheridan and Wessels, Roberto (1988) The determinants of capital structure choice. Journal of Finance 43 (1), 1–19.Google Scholar
Yosha, Oved (1995) Information disclosure costs and the choice of financing source. Journal of Financial Intermediation 4 (1), 3–20.Google Scholar