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How does the stock market respond to changes in bank lending standards?

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  • Metiu, Norbert

Abstract

I investigate the industry-level responses of U.S. stock returns to unanticipated changes in bank lending standards, exploiting cross-industry variation in the levels of dependence on external finance. I document that, on average, cumulative stock returns fall significantly by 1.36 percentage points two years after an unexpected one-standard-deviation tightening in lending standards. Moreover, moving from an industry at the 10th percentile of financial dependence to one at the 90th percentile adds between 1.24 and 2.19 additional percentage points to this effect.

Suggested Citation

  • Metiu, Norbert, 2016. "How does the stock market respond to changes in bank lending standards?," Economics Letters, Elsevier, vol. 144(C), pages 92-97.
    • Handle: RePEc:eee:ecolet:v:144:y:2016:i:c:p:92-97
    DOI: 10.1016/j.econlet.2016.04.023
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    More about this item

    Keywords

    Bank lending; FAVAR; External finance; Stock returns;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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