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

Listed author(s):
  • Pierluigi Balduzzi
  • Emanuele Brancati
  • Fabio Schiantarelli

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. Importantly, these effects dominate those of banks’ balance-sheet variables. We also show that higher CDS spreads led to lower aggregate investment, employment, and a less efficient resource allocation.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5669.

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Date of creation: 2015
Handle: RePEc:ces:ceswps:_5669
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