AN EXPLANATION FOR THE DIVERSITY OF FINANCIAL STRUCTURE

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...

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Bibliographic Details
Published in:Macroeconomic dynamics 2015-03, Vol.19 (2), p.270-287
Main Authors: Bose, Niloy, Neumann, Rebecca
Format: Article
Language:English
Subjects:
Capital structure
Economic development
Economic models
Economic statistics
Economic theory
Equity
GDP
Global economy
Gross Domestic Product
Industrialized nations
International
Low income groups
Macroeconomics
Overhead costs
Per capita
Securities markets
Stock exchanges
Studies
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Summary: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.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100513000382