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Credit Shocks Harm the Unprepared - Financing Constraints and the Financial Crisis

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  • Hetland, Ove Rein

    ()
    (Ernst & Young Transaction Advisory Services, Stavanger, and Institute for Research in Economics and Business Administration (SNF))

  • Mjøs, Aksel

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

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    Abstract

    We show that the investments of ex ante financially unconstrained firms are more profoundly affected by changes in credit supply than the investments of financially constrained firms. We employ a survey of Norwegian private firms concerning the impact of the financial crisis of 2008-9, linked to firm-level financial and bank accounts. Adverse changes in credit availability reduce investments after controlling for output demand, and this effect is largest for the least financially constrained firms. This is consistent with a model where financially constrained firms hedge against cash flow shortfalls whilst ex ante unconstrained firms rely on access to external funds.

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    Bibliographic Info

    Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2012/11.

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    Length: 53 pages
    Date of creation: 28 Sep 2012
    Date of revision:
    Handle: RePEc:hhs:nhhfms:2012_011

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    Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
    Phone: +47 55 95 92 93
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    Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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    Keywords: Credit Shocks; Financing Constraints; Financial Crisis;

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    1. Anonymous, 1994. "Monetary Policy Statement, December 1994," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 57, December.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    3. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    4. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
    5. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
    6. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    7. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    8. Sudheer Chava & Amiyatosh Purnanandam, 2006. "The effect of a banking crisis on bank-dependent borrowers," Proceedings 1030, Federal Reserve Bank of Chicago.
    9. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
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