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From financial to real economic crisis: evidence from individual firm¨Cbank relationships in Germany

Author

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  • Nadja Dwenger

    () (Universitat Hohenheim, CESifo)

  • Frank M Fossen

    () (Freie Universitat Berlin, DIW and IZA)

  • Martin Simmler

    () (Oxford University Centre for Business Taxation and DIW Berlin)

Abstract

What began as a financial crisis in the United States in 2007¨C2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy ¡ªin particular, to real investment and labour employment by nonfinancial firms. We analyse whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004¨C2010 period together with the financial statements of each firm¡¯s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm and bank-specific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labour employment significantly. This effect is larger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity.

Suggested Citation

  • Nadja Dwenger & Frank M Fossen & Martin Simmler, 2015. "From financial to real economic crisis: evidence from individual firm¨Cbank relationships in Germany," Working Papers 1516, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1516
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    References listed on IDEAS

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    Cited by:

    1. Amador, João & Nagengast, Arne J., 2016. "The effect of bank shocks on firm-level and aggregate investment," Working Paper Series 1914, European Central Bank.
    2. Bucă, Andra & Vermeulen, Philip, 2017. "Corporate investment and bank-dependent borrowers during the recent financial crisis," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 164-180.

    More about this item

    Keywords

    financial crisis; contagion; credit rationing; relationship lending; investment;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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