The Long-Run Real Effects of Banking Crises
Authors: Carlo Wix (Goethe University)
Title: The Long-Run Real Effects of Banking Crises
Abstract: This paper studies the long-run effects of credit market disruptions on real firm outcomes. Recent literature has established a negative effect of reduced credit supply on firm behavior in the short run. However, so far there is little evidence on how restricted access to external financing affects the corporate policies of firms in the long run. This paper aims to fill this gap by exploiting exogenous variation in the refinancing needs of firms during a period of reduced credit availability. Using a difference-in-differences matching approach, I find that firms which are more adversely affected by a credit supply shock reduce investment by two percentage points more over a period of two years following the shock before returning to normal levels of investment. Affected firms do not compensate for this investment gap once credit becomes available again. Thus, I find a persistent effect on accumulated firm growth of eight percentage points a full six years after the credit supply shock.