Exogenous Shocks and Real Effects of Financial Constraints: Loan- and Firm-Level Evidence around Natural Disasters
Posted: 4 Jun 2018 Last revised: 6 May 2019
Date Written: July 9, 2018
This article studies how non-financial, exogenous shocks on a subset of borrowers constrain bank lending and affect real economic activities of non-shocked firms. I separate a loan supply effect from a loan demand effect by identifying borrower-level shocks with the occurrence of major U.S. natural disasters. Financially constrained banks reallocate post-disaster lending by restricting credit supply as well as increasing loan pricing to non-shocked firms but prioritizing the disaster firms with which they have strong pre-disaster relationships. I find one dollar of additional lending to disaster firms is associated with 11.5 cents of decline of the same bank's lending to non-shocked firms. Non-shocked firms' pre-disaster dependence on such banks for financing accounts for economically significant reductions of their total loan borrowing, investment, profitability, and sales-growth in the year following a natural disaster. Consistent with frictions deriving from asymmetric information, the real outcome losses are larger for financially constrained firms.
Keywords: Propagation, Relationship Lending, Idiosyncratic Shocks, Lending-Borrowing Network, Credit Market
JEL Classification: L14, E23, G21
Suggested Citation: Suggested Citation