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What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?

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  • Kalemli-Ozcan, Sebnem
  • Kamil, Herman
  • Villegas-Sanchez, Carolina

Abstract

We provide evidence on the real effects of credit supply shocks utilizing a new firm-level database from six Latin American countries between 1990 to 2005. Holding creditworthiness constant through foreign currency debt exposure, we compare investment undertaken by domestic exporters to that of foreign-owned exporters, where the latter's exposure to the liquidity shock is lower. We find that foreign-owned exporters increase investment by 15 percentage points relative to domestic exporters only when the currency crisis occurs simultaneously with a banking crisis. These findings suggest that the key factor hindering investment during financial crises is the decline in credit supply.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8543.

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Date of creation: Aug 2011
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Handle: RePEc:cpr:ceprdp:8543

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Keywords: bank lending; exports; foreign ownership; growth; short-term dollar debt; twin crisis;

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References

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  1. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1375-1418, November.
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  10. Maggie Chen & Laura Alfaro, 2010. "Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance," Working Papers 2010-17, The George Washington University, Institute for International Economic Policy.
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Citations

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Cited by:
  1. Herman Kamil, 2012. "How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America," IMF Working Papers 12/69, International Monetary Fund.
  2. Alfaro, Laura & Chen, Maggie Xiaoyang, 2012. "Surviving the global financial crisis : foreign ownership and establishment performance," Policy Research Working Paper Series 5946, The World Bank.
  3. Brown, Martin & Lane, Philip R., 2011. "Debt overhang in emerging Europe ?," Policy Research Working Paper Series 5784, The World Bank.
  4. Sebnem Kalemli-Ozcan & Elias Papaioannou & José-Luis Peydró, 2013. "Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity," Journal of Finance, American Finance Association, vol. 68(3), pages 1179-1228, 06.
  5. Ongena, S. & Peydro, J.L. & Horen, N. van, 2013. "Shocks Abroad, Pain at Home? Bank-firm Level Evidence on the International Transmission of Financial Shocks," Discussion Paper 2013-040, Tilburg University, Center for Economic Research.
  6. Brahima Coulibaly & Horacio Sapriza & Andrei Zlate, 2011. "Trade credit and international trade during the 2008-09 global financial crisis," International Finance Discussion Papers 1020, Board of Governors of the Federal Reserve System (U.S.).

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