Equity Frictions and Firm Ownership

Abstract In this paper, I document systematic heterogeneity in ownership and financing of firms across Eurozone countries. To rationalize these differences, I build a quantitative general equilibrium model of workers and entrepreneurs who choose debt and equity financing of their firms, subject to rich country-specific financial frictions. The novel data on firm ownership and financing, combined with the structure of the model, allows me to quantify the level of debt and equity frictions in each country. Quantitatively, I find much larger output effects from equity frictions: harmonizing them across countries would lead to nearly four times larger output effects compared to debt frictions, and removing them would increase aggregate output by 73% more. The larger impact on output is due not only to the estimated levels and dispersion of equity frictions but also to the greater risk sharing provided by equity, which further incentivizes entrepreneurs to expand their firms. Through their effect on risk sharing, equity frictions also rationalize the observed negative relationship between equity financing and wealth inequality. Quantitatively, they are responsible for over 70% of the explained variation in top wealth shares across countries.