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Hackethal and Schmidt (2003) criticize a large body of literature on the financing of corporate sectors in different countries that questions some of the distinctions conventionally drawn between financial systems. Their criticism is directed against the use of net flows of finance and they propose alternative measures based on gross flows which they claim re-establish conventional distinctions. This paper argues that their criticism is invalid and that their alternative measures are misleading. There are real issues raised by the use of aggregate data but they are not the ones discussed in Hackethal and Schmidt’s paper. JEL Classification: G30
We contribute to the debate about the future of capital markets and corporate finance, which has ensued against the background of a significant boom in private markets and a corresponding decline in the number of firms and the amount of capital raised in public markets in the US and Europe.
Our research sheds light on the fluctuating significance of public and private markets for corporate finance over time, and challenges the conventional view of a linear progression from one market to the other. We argue instead that a more complex pattern of interaction between public and private markets emerges, after taking a long-term perspective and examining historical developments more closely.
We claim that there is a dynamic divide between these markets, and identify certain factors that determine the degree to which investors, capital, and companies gravitate more towards one market than the other. However, in response to the status quo, other factors will gain momentum and favor the respective other market, leading to a new (unstable) equilibrium. Hence, we observe the oscillating domains of public and private markets over time. While these oscillations imply ‘competition’ between these markets, we unravel the complementarities between them, which also militate against a secular trend towards one market. Finally, we examine the role of regulation in this dynamic divide as well as some policy implications arising from our findings.