The Real Effects of Credit Contractions: A Firm-Level Analysis

47 Pages Posted: 13 Jun 2012  

Mohammad M. Rahaman

Saint Mary's University - Sobey School of Business

Varouj A. Aivazian

University of Toronto - Rotman School of Management

Ling Sun

Brock University - Department of Economics

Date Written: June 12, 2012

Abstract

How costly are systemic credit contractions? We examine this question using episodes of systemic banking crises across many countries and compare firm sales, profitability and investment during crisis, post-crisis, and pre-crisis periods. We find that credit contractions are costly for firms and are of similar or higher magnitudes compared to costs of financial distress. The costs are higher for firms normally more reliant on the external capital market for their financing needs. Our results also show that externally dependent firms recover more quickly towards their pre-crisis levels of investment, and that the recovery is facilitated when the external capital market is "deep" or well developed. We find that the bank-lending channel mechanism is a more plausible explanation for the empirical effects of credit contractions than the borrowers' balance sheet channel.

Keywords: External Financial Dependence, Systemic Liquidity Shock, Credit Contraction, Banking Crisis, Bank Lending Channel, Balance Sheet Effect

JEL Classification: E50, G01, G21, G30

Suggested Citation

Rahaman, Mohammad M. and Aivazian, Varouj A. and Sun, Ling, The Real Effects of Credit Contractions: A Firm-Level Analysis (June 12, 2012). Available at SSRN: https://ssrn.com/abstract=2083301 or http://dx.doi.org/10.2139/ssrn.2083301

Mohammad M. Rahaman (Contact Author)

Saint Mary's University - Sobey School of Business ( email )

Halifax, Nova Scotia B3H 3C3
Canada

Varouj A. Aivazian

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Department of Economics
Toronto, Ontario M5S 3E6
Canada
416-978-2375 (Phone)
416-978-5433 (Fax)

Ling Sun

Brock University - Department of Economics ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

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