The Misfortune of Non-financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks

Shang-Jin Wei and Hui Tong

No 7208, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, making use of a measure of a firm's financial constraint based on Whited and Wu (2006) and another measure of sensitivity to a demand shock, and apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the plight of non-financial firms.

Keywords: Demand shock; Financial crisis; Liquidity constraint (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-bec, nep-cba and nep-fdg
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Citations: View citations in EconPapers (5)

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Chapter: The Misfortune of Nonfinancial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks (2014)
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