Financing firms: Beyond the dichotomy between banks and markets

Abstract

This article provides a review of the different streams of literature that have contributed, since the seminal work by Alexander Gerschenkron, to the issue on firms' financing. We show that, although the traditional dichotomy between bank and stock market is out of date, the Gerschenkronian thesis is still debated. We find that many microeconomic issues have yet to be explored. In particular, the interaction between bank and stock market in financing firms merits further attention. Finally, we show that the combinations of several approaches and the use of new techniques, such as the network analysis, can contribute to provide further results on this topic.Financial systems are nowadays largely acknowledged to be a crucial element in determining economic growth. In modern economies, they play a key role by mobilising savings, pricing risks and allocating capital to firms. The two main components of financial systems are financial institutions and financial markets. Financial institutions, being mainly different kinds of banks but also insurances, act as intermediaries by channelling resources from the suppliers of funds to the users. Conversely, financial markets allow buyers and sellers of securities to trade directly.Following a consolidated taxonomy focussing on the historical perspective, countries have been conventionally divided in bank-oriented (Continental Europe countries and Japan) and in market-oriented systems (Anglo-Saxon countries). In the former, financial institutions that bear risks and lend resources through close relationship with their clients prevails. In the latter, savings are mainly channelling through markets, where equity and debt securities are traded. One of the most important issues in the functioning of the financial systems is how resources are allocated to industrial firms. The way in which firms are financed affects many elements of a country such as the industrial structure, its specialisation, the corporate governance and, ultimately, the pace of economic growth.Traditionally, the historical literature has mainly focussed on the role played by banks following the seminal contribution by Alexander Gerschenkron (1962). Indeed, in his very influential essay Economic Backwardness in Historical Perspective, Gerschenkron maintained that banks, particularly the long term financing universal ones, are the major drivers of industrial spurts of latecomer countries, such as Germany and Italy, in the pre-World War I