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Financial Markets, BanksÕ Cost of Funding, and FirmsÕ Decisions: Lessons from Two Crises

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  • Pierluigi Balduzzi

    (Boston College)

  • Emanuele Brancati

    (LUISS University of Rome)

  • Fabio Schiantarelli

    () (Boston College and IZA)

Abstract

We test whether financial fluctuations affect firmsÕ decisions through their impact on banksÕ cost of funding. We exploit two shocks to Italian banksÕ CDS spreads and equity valuations: the 2007Ð 2009 financial crisis and the 2010Ð2012 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 banksÕ 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 through their banksÕ cost of funding.

Suggested Citation

  • Pierluigi Balduzzi & Emanuele Brancati & Fabio Schiantarelli, 2014. "Financial Markets, BanksÕ Cost of Funding, and FirmsÕ Decisions: Lessons from Two Crises," Working Papers CASMEF 1404, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:casmef:1404
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    Cited by:

    1. Raffaele Santioni & Fabio Schiantarelli & Philip E. Strahan, 2017. "Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy," NBER Working Papers 23541, National Bureau of Economic Research, Inc.
    2. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2017. "Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Uses of central balance sheet data offices' information, volume 45 Bank for International Settlements.
    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. 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.
    5. Antonio De Socio & Enrico Sette, 2018. "Firms’ investments during two crises," Temi di discussione (Economic working papers) 1173, Bank of Italy, Economic Research and International Relations Area.
    6. Vivek Sharma & Edgar Silgado-Gómez, 2019. "Sovereign Spread Volatility and Banking Sector," CEIS Research Paper 454, Tor Vergata University, CEIS, revised 08 Mar 2019.
    7. Neele Balke, 2018. "The Employment Cost of Sovereign Default," 2018 Meeting Papers 1256, Society for Economic Dynamics.
    8. Filippo De Marco, 2017. "Bank Lending and the European Sovereign Debt Crisis," Working Papers 213, Oesterreichische Nationalbank (Austrian Central Bank).
    9. Gómez, Miguel García-Posada, 2018. "Credit constraints, firm investment and growth: evidence from survey data," Working Paper Series 2126, European Central Bank.
    10. 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.
    11. 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.
    12. Berg, Tobias, 2016. "Got rejected? Real effects of not getting a loan," Working Paper Series 1960, European Central Bank.
    13. Miguel García-Posada Gómez, 2018. "Credit constraints, firms investment and growth evidence from survey data," Working Papers 1808, Banco de España;Working Papers Homepage.
    14. repec:eee:streco:v:47:y:2018:i:c:p:46-56 is not listed on IDEAS
    15. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS

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    Keywords

    Financial crisis; sovereign-debt crisis; banks; credit-default swaps; volatility; investment; employment; borrowing.;

    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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