Credit Supply Shocks, Financial Constraints and Investments for Small and Medium-sized Firms

47 Pages Posted: 27 Aug 2011 Last revised: 17 Apr 2018

See all articles by Ove Rein Hetland

Ove Rein Hetland

Norwegian School of Economics (NHH) - Department of Finance

Aksel Mjøs

Norwegian School of Economics (NHH) - Department of Finance

Date Written: March 30, 2018

Abstract

In this paper, we find that reduced credit supply reduces firm investments in our sample of small private firms. The effect is strongest for the least financially constrained firms. We use a representative survey of identified Norwegian firms that is linked with financial, bank account and ownership data, and take advantage of the financial crisis in 2008-9 as a natural experiment. We examine several potential explanations for our findings, asking: (i) did the financially constrained firms hedge against potential future credit supply shocks? (ii) did they have better access to shareholder funding? or (iii) was the effect driven by past investment patterns? We find that access to shareholder funding during the crisis offset the differences in the effects of reduced credit supply on investments across conventional financial constraint categories. The findings suggest that only examining the correlation between credit supply and investments for the ex ante most financially constrained firms during economic downturns is unlikely to capture the full dynamics of the credit channel on the business cycle.

Keywords: Financial constraints, Corporate Investment, Bank credit, Private firms, Financial crisis

JEL Classification: G20, G32

Suggested Citation

Hetland, Ove Rein and Mjøs, Aksel, Credit Supply Shocks, Financial Constraints and Investments for Small and Medium-sized Firms (March 30, 2018). Available at SSRN: https://ssrn.com/abstract=1917566 or http://dx.doi.org/10.2139/ssrn.1917566

Ove Rein Hetland

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Aksel Mjøs (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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