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The Effect of the Credit Crunch on Output Price Dynamics: The Corporate Inventory and Liquidity Management Channel

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  • Ryan Kim

Abstract

I study how a credit crunch affects output price dynamics. I build a unique micro-level data set that combines scanner-level prices and quantities with producer information, including the producer’s banking relationships, inventory, and cash holdings. I exploit the Lehman Brothers failure as a quasi-experiment and find that the firms facing a negative credit supply shock decrease their output prices approximately 15% more than their unaffected counterparts. I hypothesize that such firms reduce prices to liquidate inventory and generate additional cash flow from the product market. I find strong empirical support for this hypothesis: (i) the firms that face a negative bank shock temporarily decrease their prices and inventory and increase their market share and cash holdings relative to their counterparts, and (ii) this effect is stronger for the firms and sectors with a high initial inventory or small initial cash holdings.

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  • Ryan Kim, 2021. "The Effect of the Credit Crunch on Output Price Dynamics: The Corporate Inventory and Liquidity Management Channel," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(1), pages 563-619.
    • Handle: RePEc:oup:qjecon:v:136:y:2021:i:1:p:563-619.
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    File URL: http://hdl.handle.net/10.1093/qje/qjaa025
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    Cited by:

    1. Al-Gamrh, Bakr & Rasul, Tareq, 2024. "Recession-proof marketing? Unraveling the impact of advertising efficiency on stock volatility," International Review of Financial Analysis, Elsevier, vol. 92(C).
    2. Dichev, Ilia D. & Qian, Jingyi, 2022. "The benefits of transaction-level data: The case of NielsenIQ scanner data," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    3. Claudia Custodio & Bernardo Mendes & Diogo Mendes, 2021. "Firm responses to violent conflicts," NOVAFRICA Working Paper Series wp2106, Universidade Nova de Lisboa, Nova School of Business and Economics, NOVAFRICA.
    4. HOSONO Kaoru & TAKIZAWA Miho & YAMANOUCHI Kenta, 2022. "Financial Constraints and Markups," Discussion papers 22012, Research Institute of Economy, Trade and Industry (RIETI).
    5. Bustos, Emil, 2023. "The Effect of Financial Constraints on Inventory Holdings," Working Paper Series 1463, Research Institute of Industrial Economics.
    6. McShane, William, 2023. "Long-run competitive spillovers of the credit crunch," IWH Discussion Papers 10/2023, Halle Institute for Economic Research (IWH).
    7. Nicoletta Berardi, 2024. "R(a)ising Prices While Struggling: Firms’ Financial Constraints and Price Setting," Working papers 942, Banque de France.
    8. Balduzzi, Pierluigi & Brancati, Emanuele & Brianti, Marco & Schiantarelli, Fabio, 2024. "Credit constraints and firms’ decisions: Lessons from the COVID-19 outbreak," Journal of Monetary Economics, Elsevier, vol. 142(C).
    9. Natee Amornsiripanitch, 2022. "Bond Insurance and Public Sector Employment," Working Papers 22-03, Federal Reserve Bank of Philadelphia.
    10. Philipp Meinen & Ana Cristina Soares, 2022. "Markups and Financial Shocks," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2471-2499.
    11. Amornsiripanitch, Natee, 2022. "The real effects of municipal bond insurance market disruptions11This paper was previous circulated with the title “Bond Insurance and Public Sector Employment.” I thank Gary Gorton, Andrew Metrick, H," Journal of Corporate Finance, Elsevier, vol. 75(C).

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