12/6/2023 0 Comments Banks reduce transaction costs by![]() banking has been relatively weak historically, which helps to explain why the bond market and loans from nonbank financial companies are relatively important in the United States. The bond market supplies the rest, around 10 percent or so of total external finance (excluding trade credit Credit granted in the course of trade, as when suppliers ship their wares, then bill net 15 or 30, or when customers, like libraries for academic journals, pay for goods or services before they are provided.), except in the United States, where bonds supply about a third of the external finance of nonfinancial businesses. Loans, from banks and nonbank financial companies, supply the vast bulk of external finance in three of those countries and a majority in the fourth, the United States. In none of those countries does the stock market (i.e., equities) supply more than 12 percent of external finance. Not convinced? Check out Figure 8.1 "Sources of external finance for nonfinancial companies in four financially and economically developed countries", which shows the sources of external funds for nonfinancial businesses in four of the world’s most advanced economies: the United States, Germany, Japan, and Canada. Most of the real action, however, takes place behind closed doors in banks and other institutional lenders. ![]() The markets tend to garner more media attention because they are relatively transparent. That’s right, in dollar terms, banks, insurance companies, and other intermediaries are more important than the stock and bond markets. It turns out that the latter channel is larger than the former. But you may recall from Chapter 2 "The Financial System" that the financial system connects savers to spenders or investors to entrepreneurs in two ways, via markets and via financial intermediaries. Securities markets are important, especially in the U.S. Thus far, we have spent a lot of time discussing financial markets and learning how to calculate the prices of various types of financial securities, including stocks and bonds. How can companies meet their external financing needs?.
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