What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?

Sebnem Kalemli-Ozcan, Herman Kamil, Carolina Villegas-Sanchez

NBER Working Paper No. 16528
Issued in November 2010, Revised in July 2015
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, International Trade and Investment

We quantify the effects of lending and balance sheet channels on corporate investment during large crises in emerging markets. The depreciated currency creates investment opportunities in the tradable sector but firms might be financially constrained due to: 1) a deterioration of their balance sheet via un-hedged foreign currency debt (balance sheet channel) and 2) a decline in the supply of credit by banks (lending channel). We find that during twin crises, domestic exporters holding un-hedged foreign currency debt decrease investment while foreign exporters with better access to credit increase investment, in spite of their un-hedged foreign currency debt. We do not find such a differential effect under pure currency crises. Using firm-bank matched data during global financial crisis, we show that both domestic and foreign-owned firms experienced a decline in bank credit from affected banks however, foreign-owned firms substituted the lost credit.

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Document Object Identifier (DOI): 10.3386/w16528

Published: Sebnem Kalemli-Ozcan & Herman Kamil & Carolina Villegas-Sanchez, 2016. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," Review of Economics and Statistics, vol 98(4), pages 756-769. citation courtesy of

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