Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data

Youngju Kim (), Seohyun Lee and Hyunjoon Lim ()
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Youngju Kim: Bank of Korea
Hyunjoon Lim: Bank of Korea

No 2019-25, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the negative effect of uncertainty on bank loans. In addition, we find that the negative effect is stronger for relatively larger firms or financially unconstrained firms with low leverage or financial slack, once credit supply is controlled for. We confirm the same results in the analysis of firm investment, suggesting that high uncertainty may transmit to investment and bank loans mainly through the real options effects.

Keywords: Firm-level uncertainty; Bank loan; Investment (search for similar items in EconPapers)
JEL-codes: D84 E22 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019-11-06
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2019-25.pdf Working Paper, 2019 (application/pdf)

Related works:
Journal Article: Uncertainty, credit and investment: Evidence from firm-bank matched data (2023)
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