Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises

Pierluigi Balduzzi, Emanuele Brancati and Fabio Schiantarelli

No 824, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We test whether adverse changes to banks' market valuations during the financial and sovereign debt crises, and the associated increase in banks' cost of funding, affected firms' real decisions. Using new data linking over 3,000 non-financial Italian firms to their bank(s), we find that increases in banks' CDS spreads, and decreases in their equity valuations, resulted in lower investment, employment, and bank debt for younger and smaller firms. These effects dominate those of banks' balance-sheet variables. Moreover, CDS spreads matter more than equity valuations. Finally, higher CDS spreads led to lower aggregate investment and employment, and to a less efficient resource allocation.

Keywords: Financial crisis; sovereign debt crisis; credit default swaps; investment; employment (search for similar items in EconPapers)
JEL-codes: D92 G21 J23 (search for similar items in EconPapers)
Date: 2013-07-01, Revised 2016-08-12
New Economics Papers: this item is included in nep-ban and nep-eec
Note: previously circulated as "Banks' Market Valuations and Firms' Decisions: Lessons from Two Crises"
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Related works:
Journal Article: Financial markets, banks’ cost of funding, and firms’ decisions: Lessons from two crises (2018)
Working Paper: Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises (2015)
Working Paper: Financial Markets, BanksÕ Cost of Funding, and FirmsÕ Decisions: Lessons from Two Crises (2014)
Working Paper: Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises (2013)
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