Cyclicality of Credit Supply: Firm Level Evidence

By Bo Becker, Victoria Ivashina. 2014

419 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/39b41b757924c2520b4a7c4fd93d4d238273ffd8

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Citations in the corpus

Firms as liquidity providers: Evidence from the 2007–2008 financial crisis (2013, background): “32 receivable reverted to their pre-crisis levels only during the post-crisis period, coinciding with the rebound of bond and stock markets (Becker and Ivashina, 2011).”
Reaching for Yield in the Bond Market (2013, neutral): “Insurance companies have 32 There is prior evidence that corporate bond issuers are willing and able to adjust issuance to market conditions (Kashyap, Stein and Wilcox, 1993; Becker and Ivashina, 2011).”
CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage (2015, neutral): “Both crises followed a period of lending growth (Ivashina and Scharfstein, 2010; Becker and Ivashina, 2014), and both are among the worst financial crises in the last 50 years (Fahlenbrach, Prilmeier, and Stulz, 2012).”
The Real Effects of Credit Ratings: The Sovereign Ceiling Channel (2017, background): “Becker and Ivashina (2014b) show that during the recent Eurozone sovereign debt crisis, governments use the domestic financial sector (e.g., banks, pension funds, insurance companies) to absorb government debt, which monopolizes investor demand for highly rated corporate securities.”
Bank Bias in Europe: Effects on Systemic Risk and Growth (2015, methodology): “This re-balancing is somewhat cyclical: as Figure 7 shows using aggregate data, and as Becker and Ivashina (2014) document using firm-level data, bank loans and debt securities are partial substitutes.”
The impact of recent financial shocks on the financing and investment policies of UK private firms (2013, background): “credit supply shocks would be stronger on small and unrated firms because these firms lack access to alternative sources of finance (Bae et al., 2002; Becker and Ivashina, 2010; Akiyoshi and Kobayashi, 2010).”
Financial Repression in the European Sovereign Debt Crisis (2017, positive): “To measure movements in bank credit supply over time, we build on the methodology proposed by Becker and Ivashina (2014).”
Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans (2018, positive): “In particular, we split our sample into listed and non-listed firms given that publicly listed firms have more opportunities to tap alternative funding sources (Becker and Ivashina (2014b)).”
Bank Capital and Lending Relationships: Bank Capital and Lending Relationships (2017, neutral): “Becker and Ivashina (2014) point out numerous reasons why firms are unlikely to prefer bonds to loans during a downturn in the absence of a contraction in loan supply.”
Estimating the COVID-19 cash crunch: Global evidence and policy (2020, background): “…although banks should theoretically be willing to lend to proﬁtable ﬁrms, past experience, including that of the 2007–2009 Great Recession (e.g., De Haas and Van Horen, 2013; Becker and Ivashina, 2014), shows that ﬁrms and investors are correct to feel, at best, skeptical about this assumption.”
Issuer Quality and Corporate Bond Returns (2013, background): “, Becker and Ivashina (2010)), banks’ willingness to grant cheap credit would raise loan issuance, lower bond issuance, and lower expected bond excess returns.”