Financial Lifeline: The Disparate Impact of Banking Efficiency on Firm Investment During Economic Downturns

62 Pages Posted: 29 Nov 2023 Last revised: 7 Mar 2024

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: November 19, 2023

Abstract

Employing a Bayesian framework for principal component analysis, we construct time-varying country-specific banking efficiency indexes. Firms in economies with efficient banks exhibit significantly lower sensitivity of capital investment to economic crises. This mitigating effect is particularly pronounced for firms heavily reliant on external financing. While efficient banks increase credit supply during economic crises, they disproportionately allocate it to firms with easily collateralizable assets, potentially neglecting genuinely distressed firms with financing needs. The COVID-19 crisis underscores the interplay between banking efficiency and investment, particularly in markets with high infection rates, limited government support, and industries significantly impacted by social distancing measures.

Keywords: banking efficiency, economic crisis, investment, economic recovery, collateral assets, government support, social distancing,

JEL Classification: D84, G31, G15

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui, Financial Lifeline: The Disparate Impact of Banking Efficiency on Firm Investment During Economic Downturns (November 19, 2023). Available at SSRN: https://ssrn.com/abstract=4637626 or http://dx.doi.org/10.2139/ssrn.4637626

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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