Corporate Finance and the Transmission of Shocks to the Real Economy

Falk Bräuning, Jose Fillat and Gustavo Joaquim

No 21-18, Working Papers from Federal Reserve Bank of Boston

Abstract: Credit availability from different sources varies greatly across firms and has firm-level effects on investment decisions and aggregate effects on output. We develop a theoretical framework in which firms decide endogenously at the extensive and intensive margins of different funding sources to study the role of firm choices on the transmission of credit supply shocks to the real economy. As in the data, firms can borrow from different banks, issue bonds, or raise equity through retained earnings to fund productive investment. Our model is calibrated to detailed firm- and loan-level data and reproduces stylized empirical facts: Larger, more productive firms rely on more banks and more sources of funding; smaller firms mostly rely on a small number of banks and internal funding. Our quantitative analysis shows that bank credit supply shocks lead to a sizable reduction in aggregate output, with substantial heterogeneity across firms, due to the lack of substitutability among alternative credit sources. Finally, we show that our insights have important implications for the validity of standard empirical methods used to identify credit supply effects (Khwaja and Mian 2008).

Keywords: shocks transmission; bank-firm matching; firm financing; credit supply shocks (search for similar items in EconPapers)
JEL-codes: E32 E43 E50 G21 G32 (search for similar items in EconPapers)
Pages: 52
Date: 2021-11-01
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-cwa, nep-fdg, nep-fmk and nep-mac
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Citations: View citations in EconPapers (1)

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DOI: 10.29412/res.wp.2021.18

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