The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel

Gan, Jie

Abstract

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The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel

Jie Gan

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Review of Financial Studies, Forthcoming

Abstract:
This paper studies how a shock to the financial health of banks, caused by a decline in the asset markets, affects the real economy. The land-market collapse in Japan provides an ideal testing field in separating the impact of a loan supply shock from demand shocks. I find that banks with greater real estate exposure have to reduce lending. Firms' investment and market valuation are negatively associated with their top lender's real estate exposure. The lending channel is economically important: it accounts for one-third of lending contraction, one-fifth of the decline in investment, and a quarter of value loss.

Number of Pages in PDF File: 47

Keywords: Bank liquidity shock, Bank health, Bank relationships, Lending channel, Japanese economy

JEL Classification: G21, C41

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Date posted: February 9, 2007

Suggested Citation

Gan, Jie, The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel. Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=962288

Contact Information

Jie Gan (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong