Credit-supply shocks and firm productivity in Italy. (October 2018)

• Record Type: Journal Article
• Authors: Doerr, Sebastian; Raissi, Mehdi; Weber, Anke
• Is Part Of: Journal of international money and finance. Volume 87(2018)
• Page Start: 155
• Page End: 171
• Publication Date: 2018-10
• Subjects: D24 -- E44 -- G01 -- G21; Italy -- Credit-supply shocks -- Productivity -- Labor market rigidities; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2018.06.004
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: We examine the implications for firm productivity of adverse shocks to bank lending. We rely on varied loan exposure of banks to foreign borrowers in distress. We find that a negative shock to bank credit supply reduces firms' productivity. Labor market rigidities are important for the transmission of shocks. Effects are stronger for higher capital-intensity firms. Abstract: The Italian economy has been struggling with low productivity growth and bank balance sheet strains. This paper examines the implications for firm productivity of adverse shocks to bank lending in Italy, using a novel identification scheme and loan-level data on syndicated lending. We exploit the heterogeneous loan exposure of Italian banks to foreign borrowers in distress, and find that a negative shock to bank credit supply reduces firms' loan growth, investment, capital-to-labor ratio, and productivity. The transmission from changes in credit supply to firm productivity relates to labor market rigidities, which delay or distort the adjustment of firms' desired labor and capital allocations, and thereby reduce firms' productivity. Effects are stronger for firms with higher capital intensity and external financial dependence.