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Bank Credit, Liquidity Shocks and Firm Performance: Evidence from the Financial Crisis of 2007-2009

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  • Tamara Vovchak

Abstract

This paper provides evidence about the transmission of banking sector problems to the real sector, and examines the impact of bank credit supply frictions on firm performance. I exploit differences in the composition of banks' liabilities structure during the financial crisis of 2007-2009 as a source of exogenous variation in the availability of bank credit to nonfinancial firms, in order to identify the causal relationship between bank credit supply and firm performance, measured by firms' stock returns. My evidence indicates that banking relationships are important for firms. Firms whose banks relied more on core deposit financing had a lower decline in bank credit during the crisis than those whose banks were mainly financed by noncore sources of funding. I document a positive relationship between changes in bank credit and firms' stock returns during the crisis: a one standard deviation decline in bank credit to a firm causes a stock return reduction of 3.5 percentage points, while firms that had lending relationships with healthier banks had a lower decline in bank credit and thereby lower reductions in their stock returns during the crisis.

Suggested Citation

  • Tamara Vovchak, 2017. "Bank Credit, Liquidity Shocks and Firm Performance: Evidence from the Financial Crisis of 2007-2009," CERGE-EI Working Papers wp584, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp584
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    Cited by:

    1. Hakimi, Abdelaziz, 2018. "Threshold Effect of the Number of Bank Relationships on the Tunisian Firm Performance," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 9(2), pages 317-330, April.
    2. Hacievliyagil Nuri & Eksi Ibrahim Halil, 2019. "A Micro Based Study on Bank Credit and Economic Growth: Manufacturing Sub-Sectors Analysis," South East European Journal of Economics and Business, Sciendo, vol. 14(1), pages 72-91, June.

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    More about this item

    Keywords

    bank credit; bank liquidity shock; financial crisis; relationship lending; firm financial constraints; firm performance;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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