alternative models of financial system development.pdf

104 Stephen Prowse Alternative Models of Financial System Development Stephen Prowse 1. Introduction Dramatically different systems of corporate finance and governance have emerged among the major industrialised countries in the postwar period. Even the casual observer notices large differences between the way firms finance and govern themselves in the United States and United Kingdom on the one hand, and in Japan and Germany on the other. In this paper I describe how firms obtain external finance and how the primary mechanisms of corporate governance operate in these four countries. In addition, I consider where the Australian financial system fits in on the spectrum that has the United States and United Kingdom on one end and Japan and Germany at the other. I analyse reasons for the dramatic differences observed in corporate finance and governance systems. I discuss some of the costs and benefits of each system. Finally, I evaluate the current pressures to change that each system is under, and make some prophecies as to how corporate finance markets will evolve in the future in each country. These issues are of course fundamental to the theories of the firm, corporate finance and corporate governance that have exercised academics for many years. However, recently they have taken on a policy relevance that they have not enjoyed before. In the United States and United Kingdom there is an intense ongoing debate about the most 1 preferred methods of financing and governing firms. And in the past few years, both Japan and Germany have initiated substantial changes in their corporate finance markets. In Australia, the financial system has undergone significant changes since the early 1980s when the Campbel