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Corporate Finance and the Transmission of Shocks to the Real Economy



Credit availability from different sources varies greatly across firms and has firm-level effects on investment decisions and aggregate effects on output. We develop a theoretical framework in which firms decide endogenously at the extensive and intensive margins of different funding sources to study the role of firm choices on the transmission of credit supply shocks to the real economy. As in the data, firms can borrow from different banks, issue bonds, or raise equity through retained earnings to fund productive investment. Our model is calibrated to detailed firm- and loan-level data and reproduces stylized empirical facts: Larger, more productive firms rely on more banks and more sources of funding; smaller firms mostly rely on a small number of banks and internal funding. Our quantitative analysis shows that bank credit supply shocks lead to a sizable reduction in aggregate output, with substantial heterogeneity across firms, due to the lack of substitutability among alternative credit sources. Finally, we show that our insights have important implications for the validity of standard empirical methods used to identify credit supply effects (Khwaja and Mian 2008).

Suggested Citation

  • Falk Bräuning & José Fillat & Gustavo Joaquim, 2021. "Corporate Finance and the Transmission of Shocks to the Real Economy," Working Papers 21-18, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:93553
    DOI: 10.29412/res.wp.2021.18

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    References listed on IDEAS

    1. Philippe Bacchetta & Kenza Benhima & Céline Poilly, 2019. "Corporate Cash and Employment," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 30-66, July.
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    More about this item


    shocks transmission; bank-firm matching; firm financing; credit supply shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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

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