Bank systemic risk and corporate investment: Evidence from the US

Abstract

AcknowledgementsWe thank the Editor and two anonymous referees for constructive comments and valuable feedback. We gratefully acknowledge financial support from the Murata Science Foundation. ABSTRACTIn this paper, we use three measures that arguably capture two dimensions of "bank systemic risk", namely, (1) bank funding maturity and (2) bank asset commonality, to empirically test whether bank systemic risk has a positive effect on corporate investment. We document that in a sample of publicly listed firms in the United States over the period 1991-2013, bank systemic risk is positively associated with the firm-level investment ratio after controlling for a large set of country-level and firm-level variables. In addition, we show that a firm's leverage strengthens the positive effect of bank systemic risk on corporate investment, suggesting that more financially constrained firms experience a larger effect of bank systemic risk on corporate investment than less financially constrained firms. JEL Classification: E22; E44; G1; G21; G31

Bankruptcy prediction with financial systemic risk

“…On the one hand, as funding sources and costs are more uncertain, more risk-taking in the financial sector means the supply of funds will decrease to those risk-averse firms, which will then limit their growth opportunities (Allen et al, 2012). On the other hand, those risk-seeking firms tend to invest in riskier projects or tend to over-invest during a period of high systemic risk (Adachi-Sato and Vithessonthi, 2017). Both of the cases negatively impact on the health of a firm (e.g., weaker and less certain profitability (Chava and Purnanandam, 2011)), especially when a firm is vulnerable (i.e., in financial distress).…”