We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening. We show that if a market characterized by a disclosure law is established such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing, this might undermine bankers' incentive to screen, even when screening is efficient. Correspondingly, other things being equal, the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth. Consistent with this result, our empirical findings suggest that both bank and stock market development have a positive effect on growth, but the growth impact of bank development is lower the higher is the level of stock market development.

We quantify the signaling effect of trade credit on bank credit in a sample of US firms. Our identification strategy relies on the signaling model by Biais and Gollier (1997) and accounts for the endogeneity due to the possibility of self-selection and the simultaneity between banks’ and firms’ credit decisions. We find that: (i) firms’ self-select into trade credit; (ii) firms’ decision to use trade credit results in a higher chance of obtaining bank credit and a lower cost than the counterfactual ones they would have faced if not using trade credit.