1 / 24

Dimelis , S. a , Giotopoulos , I. b,c,d , Louri , H. a,b

Credit Crunch and Firm Growth during the Recent Financial Crisis in EU: What is the Role of Banking Concentration?. Dimelis , S. a , Giotopoulos , I. b,c,d , Louri , H. a,b a Athens University of Economics and Business, b Bank of Greece,

helia
Download Presentation

Dimelis , S. a , Giotopoulos , I. b,c,d , Louri , H. a,b

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Credit Crunch and Firm Growth during the Recent Financial Crisis in EU: What is the Role of Banking Concentration? Dimelis, S. a, Giotopoulos, I.b,c,d, Louri, H.a,b a Athens University of Economics and Business, b Bank of Greece, c Foundation for Economic & Industrial Research (IOBE), d University of Peloponnese Arnoldshain Seminar XIAntwerp, 25-28 June 2013

  2. Outline • The issue - Research Questions • Motivation - Contribution • State-of-the-art • Data • Methodology • Empirical Results • Conclusions

  3. The issue-Research Questions • The issue • Explore the effects of credit crunch on firm growth in European countries during the recent financial crisis. • Research questions • How the relationship between credit growth and firm growth evolves before and after the recent financial crisis. • How does the credit crunch - firm growth nexus differ between European banking sectors which are more/less concentrated? • Do financial firm-specific and country-specific factors affect firm growth dynamics in countries of euro-area?

  4. Motivation (I) Investigation of credit crunch is significant because: • The recent financial crisis has been the most severe in decades and its cost has been high  GDP declined by 4.4% in EU-17  Unemployment reached 9.6% (OECD, 2012). • The weak economic recovery and the credit crunch continued to take their toll on real economic activity. • The bank credit crunch following the recent financial crisis may constitute the main constraining factor for firm performance.

  5. Motivation (II) Firm growth is important because: • Contribution of growing firms to job generation (Wagner, 1992)  a positive firm growth rate implies the creation of new jobs, while a negative leads to job destruction. • Firms with higher growth rates tend to exhibit a greater likelihood to survive (Fotopoulos and Louri, 2000).

  6. Motivation (III) Firm growth is important because: • Increased firm growth rates in a specific industry may increase the input-output flows in other industries, affecting general economic development (Penrose, 1959). • Firm growth fosters the introduction of innovation and new technologies (Pagano and Schivardi, 2003)

  7. Contribution • First attempt to investigate the linkages of firm growth to credit crunch in Europe during the recent financial crisis. • In the light of the recent financial crisis, the empricalliterature offers no guidance on the way in which banking structure in terms of banking concentration is related to the credit crunch - firm growth nexus.

  8. State-of-the-art (I) • During a recession, a credit crunch could be the result of reduced demand for credit, contraction in credit supply, or both (Bernanke and Lown, 1991). • Banks usually reduce the total supply of bank credit after loan losses (Kaminsky and Reinhart, 1999; Demirguc-Kunt et al., 2006)  a “flight to quality” appears whereby banks respond by shifting their loan portfolio towards more creditworthy borrowers. • A demand-side explanation of the fall in lending focuses on the generally weak state of borrowers’ balance sheets. (Del’ Ariccia et al., 2008; Claessens et al, 2011) lower demand for external finance.

  9. State-of-the-art (II) • Higher banking concentration  lack of banking competition (Beck et al., 2003). • Boyd and De Nicolo´ (2005) argue that market power in banking allows banks to boost the interest rate they charge to firms. • Empirical evidence shows bank competition affects in a positive way firm performance (Bonaccorsi and Del’Ariccia (2004); Cetorelli and Strahan (2004); Teruel and Segarra (2010). • On the other hand, Allen and Gale, 2004 and Beck et al. (2006) argue that a less concentrated banking sector is more prone to financial crises than a concentrated banking sector.

  10. The model where • Gij,t: the growth of firm iin country j at time t • Crj,t-1 : the growth of credit in country j at time t-1 • X : vector of firm-specific variables • Z : vector of the other country-specific independent variables • We follow the growth model provided by Rajan and Zingales (1998) as adjusted at the firm level by Laeven and Valencia (2011).

  11. Variables (I) • Firm growth measured by the deviation of the natural logarithms of sales in two subsequent years (to convert sales into real values, the HICP deflator provided by Eurostat was used per country). • Firm specific variables - leverage measured by the ratio of total debt to total assets. -liquidity measured by the ratio of current assets to current liabilities.

  12. Variables (II) Country specific variables: • Credit growth = the growth rate of loans to the non-financial sector. • Banking concentration = the market share of the 5 largest banks. • Macroeconomic riskiness political, economic and financial

  13. Variables (III) • Political risk: a composite variable offactors such as: government stability, socioeconomic stability, investment profile, internal conflict, external conflict, corruption, military involvement in politics, religion involvement in politics, law and order, ethnic tensions, democratic accountability, and bureaucratic quality. • Economic risk is composed of GDP per capita, real GDP growth, annual inflation rates, budget balance as a percentage of GDP, and current account balance as a percentage of GDP. • Financial risk is composed by foreign debt as %of the country's GDP, foreign debt service as %of exports of goods and services, current account as %of exports of goods and services, net international liquidity as the months of import cover, and exchange rate stability

  14. Data (I) • Countries: euro area (17) + Lithuania • Source of firm-level data: WorldScope Database (included in Datastream) • Sources of country-level data: a) ECB & b) International Country Risk Guide • Study period: 2005-2011 (7-year time period) • Two sub-periods: Before (2005-2008) and after crisis (2009-2011) • Size of the sample: 2086 quoted firms (unbalanced panel dataset)

  15. Data (II) • Classification of firms in 2 country groupsbased on the median of the banking concentration index. • more banking concentrated countries: Estonia, Belgium, Netherlands, Finland, Lithuania, Malta, Portugal, Slovenia and Greece • less banking concentrated countries : Slovakia, Cyprus, France, Ireland, Austria, Spain, Luxembourg, Italy and Germany

  16. Estimation results (I)

  17. Estimation results (II)

  18. Discussion (I) Results of Table 1 indicate that: • Firm growth is heavily dependent on changes in bank lending (model 1). • Examining the evolution of this impact before and after the crisis (model 2) reveals that this positive and monotonic relationship disappears after the credit crunch occurrence. Possible explanation: • During the crisis years firms appear to considerably reduce credit demand being aware of the deterioration of their balance sheets, thus the unlikelihood to secure a bank loan.

  19. Discussion (II) Results of Table 1 indicate that: • There is a strong negative relationship between banking concentration and firm growth. • This means the more intensive the banking competition the easier the firms’ access to credit and the higher the growth potential. • This result is in the same line with Bonaccorsi and Del’Ariccia (2004) and Cetorelli and Strahan (2004) who provide evidence on significant positive effects of banking competition on firm performance.

  20. Discussion (III) Results of Table 2 indicate that: • There exists a statistically significant relationship between credit supply change and firm growth for all examined countries, irrespective of the degree of banking concentration. • Regarding the credit supply change-firm growth nexus, a greater sensitivity is observed for countries with higher banking concentration. • Firms operating in countries with more concentrated banking sectors appear to be more financially dependent on bank credit.

  21. Conclusions • Firm growth is heavily dependent on changes in bank credit. This strong relationship disappears during the credit crunch period. • Banking concentration has a significant negative effect on firm growth  the more intensive the banking competition the easier the firms’ access to credit and the higher the growth potential. • Firms operating in countries with more concentrated banking sectors appear to be more financially dependent on bank credit than those operating in countries where the banking sector is less concentrated and hence more competitive.

  22. Further research • It is of interest to further investigate the firm growth-credit nexus taking into account • more foreign penetrated banking systems vs. less foreign penetrated banking systems as well as • more vs. less financially stable banking systems • more vs. less financially developed countries • south vs. north countries • All the above issues could be also examined considering alternative firm performance indicators such as firm survival and firm entry.

  23. The New Acropolis Museum Deutsch: Sinnende Athena, Trauernde Athena English: Contemplative Athena, Mourning Athena Français : Athéna contemplative, Athéna pensante . ·

  24. Thank you

More Related