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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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  1. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  3. Hoyt Bleakley & Kevin Cowan, 2005. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," Research Department Publications 4411, Inter-American Development Bank, Research Department.
  4. Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
  5. Gita Gopinath & Brent Neiman, 2014. "Trade Adjustment and Productivity in Large Crises," American Economic Review, American Economic Association, vol. 104(3), pages 793-831, March.
  6. Reinhart, Carmen & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers 7131, C.E.P.R. Discussion Papers.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
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  9. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1375-1418, November.
  10. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.
  11. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2011. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," NBER Working Papers 16975, National Bureau of Economic Research, Inc.
  12. Stallings, Barbara & Studart, Rogerio, 2002. "Financial Regulation and Supervision in Emerging Markets. The Experience of Latin America since the Tequila Crisis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  13. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  14. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  15. Blalock, Garrick & Gertler, Paul J. & Levine, David I., 2008. "Financial constraints on investment in an emerging market crisis," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 568-591, April.
  16. 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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Cited by:
  1. Laura Alfaro & Maggie Chen, 2011. "Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance," NBER Working Papers 17141, National Bureau of Economic Research, Inc.
  2. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Peydró, José-Luis, 2010. "Financial regulation, financial globalization and the synchronization of economic activity," Working Paper Series 1221, European Central Bank.
  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 2013-040, Tilburg University, Center for Economic Research.
  4. 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.
  5. 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.).
  6. Brown, Martin & Lane, Philip R., 2011. "Debt overhang in emerging Europe ?," Policy Research Working Paper Series 5784, The World Bank.

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