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The Misfortune of Non-financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks

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  • Wei, Shang-Jin
  • Tong, Hui

Abstract

If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, making use of a measure of a firm's financial constraint based on Whited and Wu (2006) and another measure of sensitivity to a demand shock, and apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the plight of non-financial firms.

Suggested Citation

  • Wei, Shang-Jin & Tong, Hui, 2009. "The Misfortune of Non-financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks," CEPR Discussion Papers 7208, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7208
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    Cited by:

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    2. Shoham Amir & Pelzman Joseph, 2011. "A Review of the Crises," Global Economy Journal, De Gruyter, vol. 11(2), pages 1-19, July.
    3. Dungey, Mardi & Flavin, Thomas J. & Lagoa-Varela, Dolores, 2020. "Are banking shocks contagious? Evidence from the eurozone," Journal of Banking & Finance, Elsevier, vol. 112(C).
    4. Ham, Hyuna & Ryu, Doojin & Webb, Robert I., 2022. "The effects of overnight events on daytime trading sessions," International Review of Financial Analysis, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    Demand shock; Financial crisis; Liquidity constraint;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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