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Financial shock transmission to heterogeneous firms: the earnings-based borrowing constraint channel

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  • Chiţu, Livia
  • Grothe, Magdalena
  • Schulze, Tatjana
  • Van Robays, Ine

Abstract

We study the heterogeneous impact of jointly identified monetary policy and global riskshocks on corporate funding costs. We disentangle these two shocks in a structural BayesianVector Autoregression framework and investigate their respective effects on funding costsof heterogeneous firms using micro-data for the US. We tease out mechanisms underlyingthe effects by contrasting financial frictions arising from traditional asset-based collateralconstraints with the recent earnings-based borrowing constraint hypothesis, differentiatingfirms across leverage and earnings. Our empirical evidence strongly supports the earnings-basedborrowing constraint hypothesis. We find that global risk shocks have stronger andmore heterogeneous effects on corporate funding costs which depend on firms’ positionwithin the earnings distribution. JEL Classification: G12, E43, E52

Suggested Citation

  • Chiţu, Livia & Grothe, Magdalena & Schulze, Tatjana & Van Robays, Ine, 2023. "Financial shock transmission to heterogeneous firms: the earnings-based borrowing constraint channel," Working Paper Series 2860, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232860
    Note: 1840305
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    1. repec:ecb:ecbdps:202527 is not listed on IDEAS
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    3. Domenech Palacios, Mar, 2025. "Firms’ risk and monetary transmission: revisiting the excess bond premium," Working Paper Series 3118, European Central Bank.

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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