Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

48 Pages Posted: 8 Nov 2019

See all articles by Youngju Kim

Youngju Kim

Bank of Korea - Economic Research Institute

Seohyun Lee

International Monetary Fund (IMF) - Asia and Pacific Department; Bank of Korea - Economic Research Institute

Hyunjoon Lim

The Bank of Korea

Date Written: November 6, 2019

Abstract

This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the negative effect of uncertainty on bank loans. In addition, we find that the negative effect is stronger for relatively larger firms or financially unconstrained firms with low leverage or financial slack, once credit supply is controlled for. We confirm the same results in the analysis of firm investment, suggesting that high uncertainty may transmit to investment and bank loans mainly through the real options effects.

Keywords: Firm-level uncertainty, Bank loan, Investment

JEL Classification: D84, E22

Suggested Citation

Kim, Youngju and Lee, Seohyun and Lim, Hyunjoon, Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data (November 6, 2019). Bank of Korea WP 2019-25. Available at SSRN: https://ssrn.com/abstract=3481529 or http://dx.doi.org/10.2139/ssrn.3481529

Youngju Kim (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Seohyun Lee

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Hyunjoon Lim

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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