The Good, the Bad, and the not-so Ugly of Credit Booms: Capital Allocation and Financial Constraints
53 Pages Posted: 29 Jun 2021
Date Written: May 24, 2021
We provide international empirical evidence that periods of rapid expansion in credit — credit booms — lead to a tradeoff between a relaxation of financial constraints and a worsening of capital allocation. This tradeoff is stronger across small, financially constrained, and more innovative firms, as well as for firms in less tangible industries. In advanced economies the misallocation effect is stronger than the relaxation of financial constraints, and the opposite is true among emerging markets. Credit booms with larger capital misallocation are associated with a higher probability of experiencing a banking crisis and with poor economic and financial performance after the boom.
Keywords: Credit Boom, Capital Allocation, Financially Constrained Firms
JEL Classification: G32, G15, F44
Suggested Citation: Suggested Citation