The Misfortune of Non-Financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks

38 Pages Posted: 7 Apr 2009

See all articles by Hui Tong

Hui Tong

International Monetary Fund (IMF)

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: March 2009

Abstract

If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, making use of a measure of a firm's financial constraint based on Whited and Wu (2006) and another measure of sensitivity to a demand shock, and apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the plight of non-financial firms.

Keywords: demand shock, financial crisis, liquidity constraint

JEL Classification: G2, G3

Suggested Citation

Tong, Hui and Wei, Shang-Jin, The Misfortune of Non-Financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks (March 2009). CEPR Discussion Paper No. DP7208. Available at SSRN: https://ssrn.com/abstract=1372528

Hui Tong

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Shang-Jin Wei (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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