Financing Constraints in the 2008-9 Financial Crisis

Abstract:     
We show that investments of ex ante financially unconstrained firms are more affected by exogenous changes in credit availability than investments of financially constrained firms. We use a survey of Norwegian, primarily non-listed, firms with questions about how they were affected by the financial crisis of 2008-9, and combine the answers to these survey questions with information about the firms' financial- and bank accounts. Adverse changes in credit availability reduce investments after controlling for firm output demand, and this effect is largest for the least financially constrained firms. These findings are consistent with a theoretical model where ex ante financially constrained firms hedge against future cash flow shortfalls, and are thus less exposed to unexpected credit crunches than ex ante unconstrained firms, who rely on continuous access to external funds. The results suggest that only looking at the correlation between credit availability and firm investments of the most financially constrained firms is unlikely to capture the full dynamics of how the credit channel influences the business cycle.

Number of Pages in PDF File: 43

Keywords: credit constraints, SME-finance, survey, crisis

JEL Classification: G21, G32, C80

working papers series