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

Listed author(s):
  • Balduzzi, Pierluigi

    ()

    (Boston College)

  • Brancati, Emanuele

    ()

    (University of Rome Tor Vergata)

  • Schiantarelli, Fabio

    ()

    (Boston College)

We test whether financial fluctuations affect firms' decisions, through their impact on banks' cost of funding. We exploit two shocks to Italian bank CDS spreads and equity valuations: the 2007-2009 financial crisis and the 2010-2012 sovereign debt crisis. Using newly available data linking over 3,000, mostly privately-held, non-financial firms to their bank(s), we find that increases in Italian banks' CDS spreads and decreases in their equity valuations lead younger and smaller firms to cut investment, employment, and borrowing. We conclude that financial market fluctuations affect even private firms' real decisions by affecting the costs of funds of their banks.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7872.

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Length: 62 pages
Date of creation: Dec 2013
Handle: RePEc:iza:izadps:dp7872
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