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Financial Markets, BanksÕ Cost of Funding, and FirmsÕ Decisions: Lessons from Two Crises

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  • Pierluigi Balduzzi

    (Boston College)

  • Emanuele Brancati

    (LUISS University of Rome)

  • Fabio Schiantarelli

    (Boston College and IZA)

Abstract

We test whether financial fluctuations affect firmsÕ decisions through their impact on banksÕ cost of funding. We exploit two shocks to Italian banksÕ CDS spreads and equity valuations: the 2007Ð 2009 financial crisis and the 2010Ð2012 sovereign debt crisis. Using newly available data linking over 3,000, mostly privately held, non-financial firms to their bank(s), we find that increases in banksÕ CDS spreads, and decreases in their equity valuations, lead younger and smaller firms to cut investment, employment, and borrowing. We conclude that financial market fluctuations affect even private firms through their banksÕ cost of funding.

Suggested Citation

  • Pierluigi Balduzzi & Emanuele Brancati & Fabio Schiantarelli, 2014. "Financial Markets, BanksÕ Cost of Funding, and FirmsÕ Decisions: Lessons from Two Crises," Working Papers CASMEF 1404, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    • Handle: RePEc:lui:casmef:1404
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    More about this item

    Keywords

    Financial crisis; sovereign-debt crisis; banks; credit-default swaps; volatility; investment; employment; borrowing.;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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