Associate, NBER. I am grateful for useful comments from Asli Demirgüç-Kunt and Ross Levine, and This paper examines how a country’s organization of its financial activities- its financial structure-affects how corporations invest and raise funds. We provide an analysis of how financial structure affects economic growth for a given degree of financial and economic development. Differences in the organization of financial activities are shown to affect the creation of new businesses as well as the efficiency of investment in existing firms. Though existing research supports some of our conclusions, we identify issues on which further empirical research is required. 1. Introduction. This paper examines how the organization of financial activities within a country affects economic growth through its impact on how corporations raise and manage funds. In principle, how well a financial system performs any of its functions can affect economic growth. 1 For instance, the organization of a country’s payment system affects growth by making it easier for economic agents

This paper examines how a country's financial structure affects economic growth through its impact on how corporations raise and manage funds. We define a country's financial structure to consist of the institutions, financial technology, and rules of the game that define how financial activity is organized at a point in time. We emphasize that the aspects of financial structure that encourage entrepreneurship are not the same as those that insure the efficiency of established firms. Financial structures that permit the development of specialized capital by financial intermediaries are crucial to economic growth.

One of the most basic distortions created by the double taxation of corporate income is the disincentive to incorporate. In this paper, we investigate the extent to which the aggregate allocation of assets and taxable income in the U.S. between corporate vs. non-corporate forms of organization during the period 1959--86 has responded to the size of the tax distortion discouraging firms from incorporating. In theory, profitable firms should shift out of the corporate sector when the tax distortion to incorporating is larger, and conversely for firms with tax losses. Our empirical results provide strong support for these theoretical forecasts, and hold consistently across a wide variety of specifications and measures of the tax variables. The economic magnitudes of the effects are small, however, throwing doubt on the economic importance of tax--induced changes in organizational form.

The views expressed in this paper do not necessarily represent those of the Federal Reserve Bank

From the mid-1820s, banks became the first business sector in Great Britain and Ireland to be granted the right to form freely on an unlimited liability joint stock basis. Walter Bagehot, the renowned contemporary banking expert, warned that shares in such banks would ultimately be owned by widows, orphans and other impecunious individuals. An alternative hypothesis is that the governing bodies of these banks constrained by special legal restrictions on share trading acted effectively to prevent such shares being transferred to the less wealthy members of society. We test both conjectures using the archives of an Irish joint stock bank. The results do not support Bagehot’s hypothesis, but instead indicate that shares continued to be owned by wealthy individuals.

In this paper I analyze how corporate governance affects the performance of financial markets. I model the interaction between a firm’s manager and its shareholders, and highlight the role played by the dividend report in information revelation and information transmission. The model shows that corporate governance mechanisms affect the market liquidity of the firm’s stock (high monitoring costs and low ownership concentration lead to high market liquidity). Moreover, the effect of governance provisions that are aimed to improve financial transparency depends on the other corporate governance characteristics of the firm. Thus, disclosure of information by management associated with poor governance mechanisms may lead to an increase in the uncertainty about the liquidation value of the firm and therefore to a decrease in market liquidity.

conference and seminar participants at the AFA 2003, INSEAD, Goethe University in Frankfurt, SOAS,

During a period where Japanese banks operated under a less restrictive regulatory environment, 1986-88, we find positive relationships between bank risk and ownership concentration. This empirical evidence reveals shareholder activism by the largest shareholders. During the periods immediately before and immediately after this particular subperiod, which are characterized by stricter regulatory environments, we do no not observe evidence of shareholder activism. Taken together, these results are consistent with the argument that restrictive regulation and shareholder oversight are substitutes for one another. Time-series results and bank performance results yield consistent evidence. 2 A Note on Shareholder Oversight and the Regulatory Environment: The Japanese Banking Experience

the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us

A financial institution that finances and monitors firms learns private information about these firms. When the institution seeks funds to meet its own liquidity needs, it faces adverse selection (“liquidity”) costs that increase with the risk of its claims on these firms. The institution can reduce its liquidity costs by holding debt rather than equity. Because these costs are passed through to borrowers, firms that depend on monitored finance generally prefer to give the monitoring institution debt rather than equity; an exception is a limited setting resembling venture capital. Institutions with less frequent or less severe liquidity needs have greater appetite for equity and for the debt of more risky borrowers. These predictions are consistent with general patterns of monitored finance. This is a substantial revision of an earlier paper entitled “Monitored Finance, Liquidity, and Institutional