Edited by Geoffrey Wood and Mehmet Demirbag
Chapter 3: Financing Firms in Different Countries
Franklin Allen 3.1 INTRODUCTION In the traditional literature, there have been two approaches to the role of institutions in the financing of firms. The first is to consider how agents interact through financial markets. The second looks at the operation of financial intermediaries such as banks and insurance companies. Sixty years ago, the financial system could be neatly bifurcated in this way. Rich households and large firms used the equity and bond markets, while less wealthy households and medium and small firms used banks, insurance companies and other financial institutions. Table 3.1, for example, shows the ownership of corporate equities in 1950. Households owned over 90 per cent. By 2010 it can be seen that the situation had changed dramatically. By then households held around 36 per cent; non-bank intermediaries, primarily pension funds and mutual funds, held over 40 per cent. This change illustrates why it is no longer possible to consider the role of financial markets and financial institutions separately. Rather Table 3.1 Sector Private pension funds State & local pension funds Life insurance companies Other insurance companies Mutual funds Closed-end funds Bank personal trusts Foreign sector Household sector Other Total equities outstanding (billions of dollars) Holdings of corporate equities in the US (%) 1950 0.8 0.0 1.5 1.8 2.0 1.1 0.0 2.0 90.2 0.6 142.7 1970 8.0 1.2 1.7 1.6 4.7 0.5 10.4 3.2 68.0 0.6 841.4 1990 16.8 7.6 2.3 2.3 6.6 0.5 5.4 6.9 51.0 0.7 3543 2010 8.8 7.8 6.1 1.0 20.7 0.4 – 13.3 35.9 6.0...
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