Do Banks Affect the Level and Composition of Industrial Volatility?

Posted: 14 Jun 2005

See all articles by Borja Larrain

Borja Larrain

Pontificia Universidad Catolica de Chile

Abstract

In theory, better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions. This paper finds that the volatility of industrial output is lower in countries with more bank credit. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is reduced less strongly. Volatility dampening is achieved via counter-cyclical borrowing: at the firm level, short-term borrowing is less (or more negatively) correlated with sales and inventories in countries with high levels of bank credit.

Keywords: Banks, financial constraints, idiosyncratic volatility, volatility, inventories

JEL Classification: E32, G0, G31, O16

Suggested Citation

Larrain, Borja, Do Banks Affect the Level and Composition of Industrial Volatility?. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=741305

Borja Larrain (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

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