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The Misfortune of Non-financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks

In: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy

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  • Hui Tong
  • Shang-Jin Wei

Abstract

If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, making use of a measure of a firm's financial constraint based on Whited and Wu (2006) and another measure of sensitivity to a demand shock, and apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the plight of non-financial firms.

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This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12536.

Handle: RePEc:nbr:nberch:12536

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  1. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Discussion Paper, Tilburg University, Center for Economic Research 2009-46 S, Tilburg University, Center for Economic Research.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," NBER Working Papers 13761, National Bureau of Economic Research, Inc.
  3. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 89-112, January.
  4. Giovanni Dell'Ariccia & Luc Laeven & Deniz Igan, 2008. "Credit Booms and Lending Standards," IMF Working Papers 08/106, International Monetary Fund.
  5. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1993. "Contrarian Investment, Extrapolation, and Risk," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 84, Chicago - Center for Study of Economy and State.
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  7. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
  8. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "A Re-Examination of Exchange Rate Exposure," NBER Working Papers 8128, National Bureau of Economic Research, Inc.
  9. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "Exchange Rate Exposure," NBER Working Papers 8453, National Bureau of Economic Research, Inc.
  10. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
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  13. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  14. Ethan Cohen-Cole & Burcu Duygan-Bump & José Fillat & Judit Montoriol-Garriga, 2008. "Looking behind the aggregates: a reply to “Facts and Myths about the Financial Crisis of 2008”," Risk and Policy Analysis Unit Working Paper QAU08-5, Federal Reserve Bank of Boston.
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Cited by:
  1. Geert Bekaert & Michael Ehrmann & Marcel Fratzscher & Arnaud J. Mehl, 2011. "Global Crises and Equity Market Contagion," NBER Working Papers 17121, National Bureau of Economic Research, Inc.

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