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Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

Author

Listed:
  • Youngju Kim

    (Bank of Korea)

  • Seohyun Lee

    (The International Monetary Fund and Bank of Korea)

  • Hyunjoon Lim

    (Bank of Korea)

Abstract

This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the negative effect of uncertainty on bank loans. In addition, we find that the negative effect is stronger for relatively larger firms or financially unconstrained firms with low leverage or financial slack, once credit supply is controlled for. We confirm the same results in the analysis of firm investment, suggesting that high uncertainty may transmit to investment and bank loans mainly through the real options effects.

Suggested Citation

  • Youngju Kim & Seohyun Lee & Hyunjoon Lim, 2019. "Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data," Working Papers 2019-25, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1925
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    References listed on IDEAS

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    Cited by:

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    2. Toh, Moau Yong & Zhang, Yongmin, 2022. "Bank capital and risk adjustment responses to economic uncertainty: Evidence from emerging Southeast Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).
    3. Yunpeng Wang & Chun-Ping Chang, 2023. "The effect of policy stability on clean energy investment," Economic Change and Restructuring, Springer, vol. 56(1), pages 327-344, February.
    4. Duan, Yuejiao & Fan, Xiaoyun & Wang, Yu, 2022. "Economic policy uncertainty and bank systemic risk: A cross-country analysis," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    5. Lin, Boqiang & Li, Minyang, 2022. "Understanding the investment of renewable energy firms in the face of economic policy uncertainty – Micro-evidence from listed companies in China," China Economic Review, Elsevier, vol. 75(C).
    6. Lou, Zhukun & Chen, Siyu & Yin, Wenwei & Zhang, Chuan & Yu, Xiaoyu, 2022. "Economic policy uncertainty and firm innovation: Evidence from a risk-taking perspective," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 78-96.

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    More about this item

    Keywords

    Firm-level uncertainty; Bank loan; Investment;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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