We exploit the dramatic liquidity drought in interbank markets following the 2007 financial crisis to identify the effect of credit shocks on firm investments. We focus on a large sample of Italian firms combining information on firm-bank credit relationships with firms and banks balance sheet data. This allows estimating both the direct effect of the liquidity drought on the investment rate and the sensitivity of investment to bank credit. Our findings suggest that the liquidity drought accounts for more than 40% of the negative trend in investments experienced by sampled firms between 2007 and 2010. The effect is stronger for ex-ante constrained firms. We also find that a 10 percentage point fall in credit growth reduces the investment rate by 8-14 points over four years, depending on the definition of the credit variable. Finally, we provide evidence on the effect of credit shocks on firm activity, and on the pass-through to firm's credit chain.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous inuential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest. Terms of use: Documents inJEL-Codes: D230, E240, G210.

This paper studies whether relationship lending mitigates the transmission of the Lehman default shock to the supply of credit in Italy. Exploiting the presence of multiple banking relationships, we control for banks' and firms' unobserved characteristics. Results show that the growth of credit itself is higher and its cost lower the shorter the distance between the bank and the firm, the longer the relationship, and the higher the share of credit held by the bank. Credit growth by relationship lenders is 4.6% higher than that by transactional lenders; the increase in the cost of credit is 50 basis points lower. The positive effect of relationship lending on credit supply increased during the crisis, compared to a pre-crisis period. The beneficial effect of relationship lending is weaker if the relationship lender is more exposed to the financial crisis, especially when lending to weaker borrowers. (JEL: G21, G01) 2012 for their helpful comments and suggestions. Stefania De Mitri provided excellent research assistance. We are solely responsible for any mistake. The views expressed in this paper are our own and do not necessarily coincide with those of the Bank of Italy. This paper was previously circulated under the title "Relationship Lending in a Financial Turmoil".

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