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Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises

  • Pierluigi Balduzzi

    (Boston College)

  • Emanuele Brancati

    (University of Rome, Tor Vergata)

  • Fabio Schiantarelli

    ()

    (Boston College
    IZA)

We test whether adverse changes to banks' market valuations during the financial and sovereign debt crises, and the associated increase in banks' cost of funding, affected firms' real decisions. Using new data linking over 3,000 non-financial Italian firms to their bank(s), we find that increases in banks' CDS spreads, and decreases in their equity valuations, resulted in lower investment, employment, and bank debt for younger and smaller firms. These effects dominate those of banks' balance-sheet variables. Moreover, CDS spreads matter more than equity valuations. Finally, higher CDS spreads led to lower aggregate investment and employment, and to a less efficient resource allocation.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 824.

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Date of creation: 01 Jul 2013
Date of revision: 29 Dec 2014
Handle: RePEc:boc:bocoec:824
Note: previously circulated as "Banks' Market Valuations and Firms' Decisions: Lessons from Two Crises"
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