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

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

Abstract

We quantify the effects of the lending and balance sheet channels on corporate investment, by comparing the performance of foreign-owned exporters to that of domestic during two types of financial crises: "currency" and "twin." A currency crisis involves a depreciated currency, whereas a twin crisis is a combination of banking and currency crises. Our measure of balance sheet weakness is based on maturity and currency mismatches between assets and liabilities. During a twin crisis, a 1 percent worsening of the balance sheet translates into a 13 percent decline in investment by domestic exporters relative to foreign-owned exporters, while the latter increase investment by 5 percent in spite of the credit crunch. There is no difference in investment rates between the two set of exporters under a currency crisis, although the deterioration of their balance-sheet is similar. The results suggest a key role for illiquidity in hindering investment in the aftermath of crises.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16528.

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Date of creation: Nov 2010
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Handle: RePEc:nbr:nberwo:16528

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  3. Laura Alfaro & Maggie Chen, 2010. "Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance," Harvard Business School Working Papers 10-110, Harvard Business School.
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  8. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 95-113, October.
  9. Blalock, Garrick & Gertler, Paul J. & Levine, David I., 2008. "Financial constraints on investment in an emerging market crisis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 568-591, April.
  10. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
  11. Paravisini, Daniel & Rappoport, Veronica & Schnabl, Philipp & Wolfenzon, Daniel, 2010. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," Working Papers, Banco Central de Reserva del Perú 2010-022, Banco Central de Reserva del Perú.
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  15. repec:hrv:faseco:4784029 is not listed on IDEAS
  16. Stallings, Barbara & Studart, Rogerio, 2002. "Financial Regulation and Supervision in Emerging Markets. The Experience of Latin America since the Tequila Crisis," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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Cited by:
  1. 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.
  2. 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.
  3. 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, Tilburg University, Center for Economic Research 2013-040, Tilburg University, Center for Economic Research.
  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, American Finance Association, vol. 68(3), pages 1179-1228, 06.
  5. Brown, Martin & Lane, Philip R., 2011. "Debt overhang in emerging Europe ?," Policy Research Working Paper Series 5784, The World Bank.
  6. Brahima Coulibaly & Horacio Sapriza & Andrei Zlate, 2011. "Trade credit and international trade during the 2008-09 global financial crisis," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1020, Board of Governors of the Federal Reserve System (U.S.).

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