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We study the effect of bank loan supply through the business cycle using firm level data from 1990 to 2009. The contribution of our paper is to address two of the main empirical challenges in identifying the effects of bank credit supply. First, we focus on firms' choice between two close forms of external financing: bank debt and public bonds. By conditioning the sample of firms raising new debt, we can rule out a demand explanation for the drop in bank borrowing. Second, by doing the analysis at the firm level, we can directly address how the composition of firms raising finance varies through time. We find strong evidence of substitution from bank loans to bonds at times characterized by tight lending standards, high levels of non-performing loans to bank equity, low bank share prices and tight monetary policy. To illustrate our point, in the last half of 2007, 36% of all debt issues were bank loans. However, relative loan issuance fell to 8% by the first half of 2009, the lowest level in the period from 1990 to 2009. Although the bank-to-bond substitution can only be measured for larger firms (which have access to bond markets), we confirm that this substitution has strong predictive power for lending volume by small and unrated firms.
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Cyclicality of credit supply: firm level evidence
2011, National Bureau of Economic Research
Electronic resource
in English
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"June 2010"--Publisher's website.
"This draft: May 19, 2010"--added t.p.
Includes bibliographical references.
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"Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time-series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms' substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm's switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings"--National Bureau of Economic Research web site.
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