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 Centre for Economic Policy Research

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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