The good, the bad, and the not-so-ugly of credit booms?: capital allocation and financial constraints

Matías Braun, Francisco Marcet and Claudio Raddatz

Journal of Banking & Finance, 2024, vol. 161, issue C

Abstract: We provide international empirical evidence that periods of rapid expansion in credit—credit booms—lead to both a relaxation of financial constraints and a worsening of capital allocation. These two effects are related, suggesting a more prominent role for the investor sentiment views of the credit cycle. Firms more likely to be financially constrained because of their size, industry, or country experience stronger misallocation in booms. At the macro level, credit booms with higher capital misallocation result in a higher probability of experiencing a banking crisis and poor economic and financial performance after the boom ends.

Keywords: Credit boom; Capital allocation; Financially constrained firms (search for similar items in EconPapers)
JEL-codes: E22 G01 G21 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000189

DOI: 10.1016/j.jbankfin.2024.107098

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