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Bank credit, liquidity and firm-level investment: are recessions different?

Author

Listed:
  • Ines Buono

    (Bank of Italy)

  • Sara Formai

    (Bank of Italy)

Abstract

How do bank credit supply shocks affect firms' investment decisions? We use time-varying data on Italian firms and banks to disentangle shocks to the credit supply using bank mergers and acquisitions as an instrumental variable. We find that credit constraints can hamper the ability of firms to invest. Moreover, while firms normally tend to use liquidity as a substitute for bank credit, they do not do so during recessions, a fact that amplifies the cutback on productive investment following a bank credit supply shock.

Suggested Citation

  • Ines Buono & Sara Formai, 2019. "Bank credit, liquidity and firm-level investment: are recessions different?," Temi di discussione (Economic working papers) 1239, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1239_19
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    References listed on IDEAS

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    Cited by:

    1. Margherita Bottero & Stefano schiaffi, 2022. "Firm liquidity and the transmission of monetary policy," Temi di discussione (Economic working papers) 1378, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Corporate investments; financing constraints; Mergers and Acquisitions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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