Does Credit Crunch Investment Down? New Evidence on the Real Effects of the Bank-Lending Channel

Abstract

We exploit the dramatic liquidity drought in interbank markets following the 2007 financial crisis to identify the effect of credit shocks on firm investments. We focus on a large sample of Italian firms combining information on firm-bank credit relationships with firms and banks balance sheet data. This allows estimating both the direct effect of the liquidity drought on the investment rate and the sensitivity of investment to bank credit. Our findings suggest that the liquidity drought accounts for more than 40% of the negative trend in investments experienced by sampled firms between 2007 and 2010. The effect is stronger for ex-ante constrained firms. We also find that a 10 percentage point fall in credit growth reduces the investment rate by 8-14 points over four years, depending on the definition of the credit variable. Finally, we provide evidence on the effect of credit shocks on firm activity, and on the pass-through to firm's credit chain.

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

“…The related empirical literature (Popov and van Horen (2015), , Cingano et al (2016), Bofondi et al (forthcoming), Acharya et al (2016a), Beltratti and Stulz (2015), Bottero et al (2017), Del Giovane et al (2013) almost unanimously confirms the negative spillover. Our paper complements these applied studies by analyzing how the ECB liquidity injection helped undoing the ongoing credit crunch.…”

Corporate debt and investment: A firm-level analysis for stressed euro area countries

“…Moreover, changes in general risk sentiment may impact on the leverage target through both the supply of and demand for funds (see e.g. Amador and Nagengast, 2016;Buca and Vermeulen, 2017;Cingano et al, 2016;Storz et al, 2017). We will come back to these aspects in the empirical section.…”

External Financing Constraints and Firm's Innovative Activities During the Financial Crisis

“…The breakdown of the interbank market offers the opportunity to identify a cross-sectional dimension and differences between banks in refinancing themselves, as empirical studies provide evidence that banks relying heavily on this type of funding reduced credit supply to corporate customers more sharply (Iyer et al 2014;Cingano et al 2016). Then the causal relation between the credit crunch due to the activities of the banks can be separated from individual firm effects.…”

“…It has been shown that these lending constraints were transmitted to the real sector, and led to reduced corporate investments and employment (e.g. Campello et al 2010;ChodorowReich 2013;Cingano et al 2016). In contrast to capital and employment effects, causal evidence on the interaction between the bank system and innovation at firm level during the financial crisis does not exist.…”

“…We use the fact that the collapse of the interbank market led to lending reductions and in consequence to reductions in real outcomes like capital expenditures (e.g. Cingano et al 2016). …”