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What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?

  • Sebnem Kalemli-Ozcan
  • Herman Kamil
  • Carolina Villegas-Sanchez

We quantify the effects of lending and balance sheet channels on corporate investment during large crises in emerging markets. The depreciated currency creates investment opportunities in the tradable sector but firms might be financially constrained due to: 1) a deterioration of their balance sheet via un-hedged foreign currency debt (balance sheet channel) and 2) a decline in the supply of credit by banks (lending channel). We find that during twin crises, domestic exporters holding un-hedged foreign currency debt decrease investment while foreign exporters with better access to credit increase investment, in spite of their un-hedged foreign currency debt. We do not find such a differential effect under pure currency crises. Using firm-bank matched data during global financial crisis, we show that both domestic and foreign-owned firms experienced a decline in bank credit from affected banks however, foreign-owned firms substituted the lost credit.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16528.

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Date of creation: Nov 2010
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Handle: RePEc:nbr:nberwo:16528
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  1. Laura Alfaro & Maggie Chen, 2010. "Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance," Harvard Business School Working Papers 10-110, Harvard Business School.
  2. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2011. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," NBER Working Papers 16975, National Bureau of Economic Research, Inc.
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  9. Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers 7131, C.E.P.R. Discussion Papers.
  10. Gita Gopinath & Brent Neiman, 2011. "Trade Adjustment and Productivity in Large Crises," NBER Working Papers 16958, National Bureau of Economic Research, Inc.
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  12. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," NBER Working Papers 15639, National Bureau of Economic Research, Inc.
  14. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  15. Hoyt Bleakley & Kevin Cowan, 2005. "Corporate Dollar Debt and Depreciations: Much Ado about Nothing?," IDB Publications (Working Papers) 6693, Inter-American Development Bank.
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