Unformatted text preview: al, corporations issue
securities to finance their investments in real assets and cover the gap between their investment plans and their internally generated savings such as retained earnings.
As shown in Figure 1–1, in such a world savings would flow from households to
corporations; in return, financial claims (equity and debt securities) would flow from
corporations to household savers.
In an economy without FIs, the level of fund flows between household savers and
the corporate sectors is likely to be quite low. There are several reasons for this. Once
they have lent money to a firm by buying its financial claims, households need to monitor or check the actions of that firm. They must be sure that the firm’s management
neither absconds with nor wastes the funds on any projects with low or negative net
present values. Such monitoring actions are extremely costly for any given household
because they require considerable time and expense to collect sufficiently high-quality
information relative to the size of the average household saver’s investments....
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- Spring '09
- Accounting, Financial services, FIS, Depository Institutions