SFB 504 discussion paper 97-02

Martin Hellwig
Sonderforschungsbereich 504
L 13, 15, D-68131 Mannheim

Unternehmensfinanzierung, Unternehmenskontrolle und Ressourcenallokation: Was leistet das Finanzsystem?

The paper reviews the literature on the role of the financial system for corporate finance and control and takes stock of our understanding of the issues. Topics covered include the information efficiency of organized markets, the significance of information efficiency for corporate control, the role of financial intermediaries, the preponderance of internal finance, and the political economy of corporate control and finance. The paper questions the standard assumption that firms are willing to trade control for finance, or that such contracts if they are made are actually maintained. The paper suggests that the pre- ponderance of internal finance and the political system's willingness to support management control over assets and retentions are the major empirical phenomenon to be explained and analysed. It argues that these phenomena turn the financial systems of developed economies from systems channeling funds from households to firms into systems channeling funds from firms with excess cash flow to firms with excess investment opportunities. Existing theories, including Jensen's free-cash-flow hypothesis, do not provide a fully satisfactory account of the allocative implications of this structure.
Creation date:
Publication Status
B. Gahlen, H. Hesse, H.J. Ramser (eds), Finanzmärkte, Mohr Siebeck, Tübingen 1997.
Downloadable version
Download titlepage for internal use only

Direct questions and comments to our webmaster.