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

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  • Balduzzi, Pierluigi

    () (Boston College)

  • Brancati, Emanuele

    () (University of Rome Tor Vergata)

  • Schiantarelli, Fabio

    () (Boston College)

Abstract

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.

Suggested Citation

  • Balduzzi, Pierluigi & Brancati, Emanuele & Schiantarelli, Fabio, 2013. "Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises," IZA Discussion Papers 7872, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7872
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    Cited by:

    1. De Marco, Filippo & Wieladek, Tomasz, 2015. "The real effects of capital requirements and monetary policy: evidence from the United Kingdom," Bank of England working papers 573, Bank of England.
    2. repec:bis:bisifc:45-08 is not listed on IDEAS
    3. Ryan Banerjee & Enrico Sette & Leonardo Gambacorta, 2017. "The real effects of relationship lending," Temi di discussione (Economic working papers) 1133, Bank of Italy, Economic Research and International Relations Area.
    4. Holton, Sarah & McCann, Fergal, 2016. "Sources of the small firm financing premium: Evidence from euro area banks," Research Technical Papers 09/RT/16, Central Bank of Ireland.
    5. Berg, Tobias, 2016. "Got rejected? Real effects of not getting a loan," Working Paper Series 1960, European Central Bank.
    6. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS
    7. Raffaele Santioni & Fabio Schiantarelli & Philip E. Strahan, 2017. "Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy," Boston College Working Papers in Economics 929, Boston College Department of Economics.
    8. Acharya, Viral V & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2014. "Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans," CEPR Discussion Papers 10108, C.E.P.R. Discussion Papers.
    9. Filippo De Marco, 2017. "Bank Lending and the European Sovereign Debt Crisis," Working Papers 213, Oesterreichische Nationalbank (Austrian Central Bank).
    10. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2016. "Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy," NBER Working Papers 22034, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    financial market shocks; banks; credit-default swaps; volatility; investment; employment; lending;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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