The Good, the Bad, and the not-so Ugly of Credit Booms: Capital Allocation and Financial Constraints

69 Pages Posted: 29 Jun 2021 Last revised: 17 Jun 2022

See all articles by Matías Braun

Matías Braun

ESE Business School, Universidad de los Andes

Francisco Marcet

University of Chile

Claudio E. Raddatz

University of Chile, School of Economics and Business

Date Written: May 24, 2021

Abstract

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 and more opaque industries. While the misallocation effect is similar for firms located in countries with different levels of income and financial development, firms in poorer and less financially developed countries enjoy a greater relaxation of financial constraints. Credit booms with higher 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

Braun, Matias and Marcet, Francisco and Raddatz, Claudio E., The Good, the Bad, and the not-so Ugly of Credit Booms: Capital Allocation and Financial Constraints (May 24, 2021). Available at SSRN: https://ssrn.com/abstract=3868620 or http://dx.doi.org/10.2139/ssrn.3868620

Matias Braun

ESE Business School, Universidad de los Andes ( email )

Av. La Plaza 1905
San Carlos de Apoquindo, Las Condes
Santiago
Chile

Francisco Marcet

University of Chile

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Claudio E. Raddatz (Contact Author)

University of Chile, School of Economics and Business ( email )

Diagonal Paraguay 257, Of. 1206
Santiago, R. Metropolitana 7520421
Chile

HOME PAGE: http://alum.mit.edu/www/craddatz

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