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Financial Markets, Banks ’ Cost of Funding, and Firms ’ Decisions: Lessons from Two Crises (2014)
BibTeX
@MISC{Balduzzi14financialmarkets,,
author = {Pierluigi Balduzzi and Emanuele Brancati and Fabio Schiantarelli and Phil Strahan and Carmine Trecroci},
title = {Financial Markets, Banks ’ Cost of Funding, and Firms ’ Decisions: Lessons from Two Crises},
year = {2014}
}
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Abstract
We test whether adverse changes to banks ’ market valuations during the financial and sovereign debt crisis, and the associated increase in banks ’ cost of funding, affected firms ’ real decisions. Using new data linking over 3,000 non-financial Italian firms to their bank(s), we find that increases in banks ’ CDS spreads, and decreases in their equity valuations, led younger and smaller firms to cut investment, employment, and borrowing. 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 a less efficient resource allocation.
Keyphrases
bank cost firm decision financial market equity valuation efficient resource allocation non-financial italian firm bank cd spread sovereign debt crisis affected firm real decision bank balance-sheet variable associated increase bank market valuation aggregate investment new data adverse change
