Banks, Financial Markets and Growth

TitleBanks, Financial Markets and Growth
Publication TypeWorking Paper
Year of Publication2005
AuthorsLG. Deidda, B. Fattouh
Number2005_11
Keywordsbank-finance, economic growth, market-finance, monitoring, screening
Abstract

We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening.We show that,if a market is established characterized by a disclosure law such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing,this might undermine bankers'incentive to screen,even when screening is effcient.Correspondingly,other things being equal,the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth.Consistent with this result,our empirical findings suggest that,althoug both bank and stock market development have a positive effect on growth, the growth impact of bank development is reduced by the development of the stock market.

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