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Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries

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  • Ross Levine
  • Chen Lin
  • Wensi Xie

Abstract

Do stock markets act as a “spare tire” during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of banking crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on firm profitability, employment, equity issuances, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the crisis, or overall economic, legal, and institutional development. The evidence is consistent with the view that stronger shareholder protection laws provide the legal infrastructure for stock markets to act as alternative sources of finance when banking systems go flat, easing the impact of the crisis on the economy.

Suggested Citation

  • Ross Levine & Chen Lin & Wensi Xie, 2015. "Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries," NBER Working Papers 20863, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20863
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Sam Langfield & Marco Pagano, 2016. "Bank bias in Europe: effects on systemic risk and growth," Economic Policy, CEPR;CES;MSH, vol. 31(85), pages 51-106.
    2. Gu, Xian & Kowalewski, Oskar, 2016. "Creditor rights and the corporate bond market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 215-238.
    3. Howard Bodenhorn, 2016. "Two Centuries of Finance and Growth in the United States, 1790-1980," Working Papers id:11352, eSocialSciences.
    4. Popov, Alexander, 2017. "Evidence on finance and economic growth," Working Paper Series 2115, European Central Bank.
    5. Sotirios Kokas & Dmitri Vinogradov & Marios Zachariadis, 2018. "Which Banks Smooth and at What Price?," University of Cyprus Working Papers in Economics 01-2018, University of Cyprus Department of Economics.
    6. Aldasoro, Iñaki & Unger, Robert, 2017. "External financing and economic activity in the euro area: Why are bank loans special?," Discussion Papers 04/2017, Deutsche Bundesbank.
    7. Gu, Xian & Kowalewski, Oskar, 2015. "Creditor rights and corporate bond market," MPRA Paper 67022, University Library of Munich, Germany.
    8. Claessens, Stijn, 2017. "Regulation and structural change in financial systems," CEPR Discussion Papers 11822, C.E.P.R. Discussion Papers.
    9. Ross Levine & Chen Lin & Wensi Xie, 2016. "Corporate Resilience to Banking Crises: The Roles of Trust and Trade Credit," NBER Working Papers 22153, National Bureau of Economic Research, Inc.
    10. repec:eee:corfin:v:48:y:2018:i:c:p:122-147 is not listed on IDEAS

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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