Cyclicality of credit supply: Firm level evidence

Abstract

cyclicality of credit supply: firm level evidence bo becker victoria ivashina working paper 10-107 august 23, 2011 copyright © 2010, 2011 by bo becker and victoria ivashina working papers are in draft form. this working paper is distributed for purposes of comment and discussion only. it may not be reproduced without permission of the copyright holder. copies of working papers are available from the author. cyclicality of credit supply: firm level evidence bo becker harvard university and nber victoria ivashina harvard university and nber first draft: may 19, 2010 this draft: august 23, 2011 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 timeseries. 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 …

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