Banking Crises and Investments in Innovation

Oana Peia

No 201727, Working Papers from School of Economics, University College Dublin

Abstract: This paper proposes a new channel to explain the medium- to long-term effects of banking crises on the real economy. It embeds a banking sector prone to runs in a stylized growth model to show that episodes of bank distress affect not only the volume, but also the composition of firm investment, by disproportionally decreasing investments in innovation. Thishypothesis is confirmed empirically employing industry-level data on R&D spending around 13 recent banking crises episodes. Using difference-in-difference identification strategies, I show that industries that depend more on external finance, in more bank-based economies, invest disproportionally less in R&D following systemic banking crises. These industries also have a lower share of R&D spending in total investment, suggesting a shift in the composition of investment that is specific to recessions following banking crises and not other business cycle recessions.

Keywords: Banking crises; R&D investment; Financial dependence; Global games (search for similar items in EconPapers)
JEL-codes: E22 G01 G21 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2017-12
New Economics Papers: this item is included in nep-cfn, nep-cse, nep-fdg, nep-ino, nep-mac and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://hdl.handle.net/10197/9101 First version, 2017 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201727

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