Do Banks Buffer Equity Market Shocks? Fire Sales Around the World and Corporate Financing

Massimo Massa, Chuyi Yang and Lei Zhang

No 19395, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We posit that equity markets cannot fully differentiate between “fire-sales†triggered by redemptions and those caused by fundamental shocks, which leads to distorted price discovery and reduced stock liquidity. Thus, firms opt for the least information-sensitive type of external financing: non-market-based bank loans. To test this hypothesis, we use a comprehensive sample of global firms that includes detailed information on foreign institutional investor holdings. International fire-sales negatively impact foreign institutional ownership, stock liquidity, and market valuations. Firms exposed to international fire-sales reduce their equity financing, increase their leverage, and shift their debt structure toward bank loans.

JEL-codes: G10 G15 G21 (search for similar items in EconPapers)
Date: 2024-08
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