Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of San Francisco
Working Paper Series
A theory of banks, bonds, and the distribution of firm size
Katheryn N. Russ
Diego Valderrama
Abstract

We 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.


Download Full text
Cite this item
Katheryn N. Russ & Diego Valderrama, A theory of banks, bonds, and the distribution of firm size, Federal Reserve Bank of San Francisco, Working Paper Series 2009-25, 2009.
More from this series
JEL Classification:
Subject headings:
Keywords: Bond market ; Bank loans
For corrections, contact Noah Pollaczek ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal