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Spare tire? Stock markets, banking crises, and economic recoveries

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  • Levine, Ross
  • Lin, Chen
  • Xie, Wensi

Abstract

Do stock markets act as a spare tire during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of these crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on equity issuances, firm profitability, employment, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the banking crisis, or overall economic, legal, and institutional development.

Suggested Citation

  • Levine, Ross & Lin, Chen & Xie, Wensi, 2016. "Spare tire? Stock markets, banking crises, and economic recoveries," Journal of Financial Economics, Elsevier, vol. 120(1), pages 81-101.
  • Handle: RePEc:eee:jfinec:v:120:y:2016:i:1:p:81-101
    DOI: 10.1016/j.jfineco.2015.05.009
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    More about this item

    Keywords

    Shareholder protection laws; Corporate finance; Financial crises; Firm profits; Firm investment choices;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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