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Financial markets, banks’ cost of funding, and firms’ decisions: Lessons from two crises

Pierluigi Balduzzi, Emanuele Brancati () and Fabio Schiantarelli ()

Journal of Financial Intermediation, 2018, vol. 36, issue C, 1-15

Abstract: We test whether adverse changes to banks’ market valuations during the financial and sovereign debt crises affected firms’ real decisions. Using new data linking over 5000 non-financial Italian firms to their bank(s), we find that increases in banks’ CDS spreads, and decreases in their equity valuations, resulted in lower investment, employment, and bank debt for younger and smaller firms. These effects dominate those of banks’ balance-sheet variables. Moreover, CDS spreads matter more than equity valuations. Finally, higher CDS spreads led to lower aggregate investment and employment, and to less efficient resource allocations, especially during the sovereign debt crisis.

Keywords: Financial crisis; Sovereign debt crisis; Credit default swaps; Investment; Employment (search for similar items in EconPapers)
JEL-codes: E44 G01 E22 E24 G21 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises (2016) Downloads
Working Paper: Financial Markets, BanksÕ Cost of Funding, and FirmsÕ Decisions: Lessons from Two Crises (2014) Downloads
Working Paper: Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises (2013) Downloads
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