| Author: | Boot, A. W. A. Thakor, A. V. |
| Title: | Financial system architecture |
| Journal: | Review of Financial Studies
1997 : FALL, VOL. 10:3, p. 693-733 |
| Index terms: | STRUCTURAL ANALYSIS FINANCIAL SERVICES FINANCIAL MARKETS BANKS |
| Language: | eng |
| Abstract: | This article rationalizes the coexistence of banks and financial markets based on assumptions about primitives: endowments, types of agents, informational constraints. Banks arise as coalitions of agents who coordinate their actions to resolve asset-substitution moral hazard. The financial market arises to permit noncolluding agents to compete, which facilitates the transmission of valuable information about market conditions with a concomitant impact on firms' real decisions. It was found that borrowers who pose onerous asset-substitution moral hazards prefer bank financing, and those who pose less serious moral hazard go to the capital market. The predictions of this theory match up with cross-sectional differences across industries. |
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