Abstract

Italian business firms rely on banks for external finance to a larger extent than those of other advanced economies. Bank dependence is also associated to comparatively high levels of leverage, which amplify the negative effects of business cycles downturns. Promoting a more market-based financial system has been the target of several policy programs, enlarged and reinforced in the aftermath of the financial crisis. In this paper we argue that the success of these programs depends on their ability to push the size of market finance above the critical threshold that makes investment and issuance of shares and bonds cost efficient. To this end, among the recent reforms, we single out those aiming at strengthening firms' equity as those more likely to make an impact.