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Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel

Author

Listed:
  • Livia Chiţu
  • Magdalena Grothe
  • Tatjana Schulze
  • Ine Van Robays

Abstract

We study the heterogeneous impact of jointly identified monetary policy and global risk shocks on corporate funding costs. We disentangle these two shocks in a structural Bayesian Vector Autoregression framework and investigate their respective effects on funding costs of heterogeneous firms using micro-data for the US. We tease out mechanisms underlying the effects by contrasting traditional financial frictions arising from asset-based collateral constraints with the recent earnings-based borrowing constraint hypothesis, differentiating firms across leverage and earnings. Our empirical evidence strongly supports the earnings-based borrowing constraint hypothesis. We find that global risk shocks have stronger and more heterogeneous effects on corporate funding costs which depend on firms' position within the earnings distribution.

Suggested Citation

  • Livia Chiţu & Magdalena Grothe & Tatjana Schulze & Ine Van Robays, 2023. "Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel," IMF Working Papers 2023/196, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/196
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    Cited by:

    1. Lodge, David & Manu, Ana-Simona & Van Robays, Ine, 2024. "China's footprint in global financial markets," BOFIT Discussion Papers 1/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Lodge, David & Manu, Ana-Simona & Van Robays, Ine, 2023. "China’s footprint in global financial markets," Working Paper Series 2861, European Central Bank.

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