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Credit Markets, Corporate Governance and Growth

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Abstract

We investigate the interaction between the banking sector and corporate governance in an economy where banks act both as monitors of managerial frictions and as facilitators of new firm creation. We find that, when banks engage in relational lending with borrowing firms, these two activities can generate different consequences for incumbent firms’ investment and growth. The calibrated general equilibrium model reveals that positive shocks to banks’ monitoring efficiency boost incumbents’ investments and growth in both the short and the long run. Increases in banks’ efficiency at entry can instead depress investment and growth by exacerbating managers’ incentives to divert resources for out-of-firm projects. Quantitative experiments indicate that banking development that increases the overall banking efficiency can induce a hump-shaped response of output growth and welfare. We test the mechanisms of the model using data from the Italian corporate and banking sector.

Suggested Citation

  • Emanuele Brancati & Paolo E. Giordani & Maurizio Iacopetta & Raoul Minetti, 2025. "Credit Markets, Corporate Governance and Growth," CEIS Research Paper 595, Tor Vergata University, CEIS, revised 19 Mar 2025.
    • Handle: RePEc:rtv:ceisrp:595
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    More about this item

    Keywords

    Banks; Corporate Governance; Investments; Entry;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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