Banks, financial markets, and Growth

We analyze the interaction between bank and market nance in a model where
bankers gather information through monitoring and screening. We show that, if
a market is established characterized by a disclosure law such that entrepreneurs
wishing to raise market nance can credibly disclose their sources of financing, this might undermine bankers' incentive to screen, even when screening is effcient. Correspondingly, other things being equal, the change from a bank-based system to one in which market-nance and bank-nance coexist might have an adverse affect on economic growth. Consistent with this result, our empirical findings suggest that,
although both bank and stock market development have a positive eect on growth,
the growth impact of bank development is reduced by the development of the stock
market.