Foreign and Domestic Loans over the Business Cycle
37 Pages Posted: 27 Mar 2019 Last revised: 7 Jun 2019
Date Written: June 4, 2019
During good economic times, domestic firms' probability of obtaining loans from foreign banks increases in the firm's opacity. During downturns in the domestic economy, this relation reverses as the probability of obtaining a foreign loan decreases for all firms, but drops disproportionately for opaque borrowers. Firms that are in closer proximity to foreign banks by some measure (such as firms with a higher share of foreign sales) are always more likely to obtain foreign loans due to lower transaction costs. We derive these predictions in a formal theoretical framework and confirm them empirically using a loan-bank-firm level dataset covering forty countries during the 1999--2016 period.
Keywords: foreign banks, cross-border loans, business cycles
JEL Classification: G21, E44, F65
Suggested Citation: Suggested Citation