Foreign Lenders and the Real Sector

Leo Ferraris and Raoul Minetti

Journal of Money, Credit and Banking, 2007, vol. 39, issue 4, 945-964

Abstract: We develop a theory of the interaction between the entry of lenders and the real sector. The high liquidation skills of incumbent lenders render them too tough in terminating high‐risk/return projects. Being “foreign” to the market, newcomers have lower ability to liquidate than incumbents. This makes them softer in liquidating high‐risk/return projects but renders their funding more costly. We show that the entry of lenders and the share of high‐risk/return projects can reinforce each other through firms' liquidation values. This interaction dampens the output impact of liquidity shocks. Hence, financial liberalization can enhance stability.

Date: 2007
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https://doi.org/10.1111/j.1538-4616.2007.00052.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:39:y:2007:i:4:p:945-964

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