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Credit supply shocks, financial constraints and investments for small and medium-sized firms

Author

Listed:
  • Hetland, Ove Rein

    (Ernst & Young Transaction Advisory Services, Stavanger, and Institute for Research in Economics and Business Administration (SNF))

  • Mjøs, Aksel

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

In this paper, we find that reduced credit supply reduces firm investments in our sample of small private firms. The effect is strongest for the least financially constrained firms. We use a representative survey of identified Norwegian firms that is linked with financial, bank account and ownership data, and take advantage of the financial crisis in 2008–9 as a natural experiment. We examine several potential explanations for our findings, asking: (i) did the financially constrained firms hedge against potential future credit supply shocks? (ii) did they have better access to shareholder funding? or (iii) was the effect driven by past investment patterns? We find that access to shareholder funding during the crisis offset the differences in the effects of reduced credit supply on investments across conventional financial constraint categories. The findings suggest that only examining the correlation between credit supply and investments for the ex ante most financially constrained firms during economic downturns is unlikely to capture the full dynamics of the credit channel on the business cycle.

Suggested Citation

  • Hetland, Ove Rein & Mjøs, Aksel, 2012. "Credit supply shocks, financial constraints and investments for small and medium-sized firms," Discussion Papers 2012/11, Norwegian School of Economics, Department of Business and Management Science, revised 30 Mar 2018.
  • Handle: RePEc:hhs:nhhfms:2012_011
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    File URL: http://hdl.handle.net/11250/164206
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    References listed on IDEAS

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    Cited by:

    1. Alfranseder, Emanuel & Dzhamalova, Valeriia, 2014. "The Impact of the Financial Crisis on Innovation and Growth: Evidence from Technology Research and Development," Knut Wicksell Working Paper Series 2014/8, Lund University, Knut Wicksell Centre for Financial Studies.
    2. Sandra M. Leitner & Robert Stehrer, 2016. "The Role of Financial Constraints for Different Innovation Strategies: Evidence for CESEE and FSU Countries," wiiw Working Papers 125, The Vienna Institute for International Economic Studies, wiiw.
    3. Michael Landesmann & Sandra M. Leitner & Robert Stehrer, 2016. "Changing Patterns in M&E-Investment-Based Innovation Strategies in CESEE and FSU Countries," wiiw Working Papers 123, The Vienna Institute for International Economic Studies, wiiw.

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    More about this item

    Keywords

    Financial constraints; Corporate Investment; Bank credit; Private firms; Financial crisis;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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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