The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. The author examines trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm's creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. The author ask to which extent a channel may contribute to the stock price -output relation when there is mutual feedback. A model à la Delli Gatti et al. (A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility, 2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank's equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners' influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision of managers they act more prudently and this fosters growth.
Empirical evidence shows that innovative firms are often more constrained in obtaining external funds than less innovative firms. Explanations are based on the uncertain outcome and high costs of R&D effort. When providing credit, the lender assesses the creditworthiness of the borrower. She relies on financial data and market analysis. The financial data analysis reveals costs and the market outlook is linked to the uncertainty of future profitability. In this paper we examine whether the credit assessment behaviour of banks hurts firms of a more innovative sector more and how this affects long term innovative success and economic development. We use an evolutionary approach à la Nelson and Winter but with two sectors. A bank provides credit and supplies it to single firms based on a rating. We illuminate the impact of rating process characteristics on the long term outcome. When the bank does not distinguish for sector-specific features, such as risk and market outlook, the high-tech sector benefits over-proportionally because the surviving firms have a high profitability and further innovations are more likely. The way that the bank forms expectations about the market outlook influences the allocation of credit between sectors. The innovative sector is supplied more credit if the market outlook is assessed in a rather conservative fashion. The impact on aggregates however, is limited because the bank uses other pieces of information as well.
Empirical evidence shows that innovative firms are often more constrained in obtaining external funds than less innovative firms. Explanations are based on the uncertain outcome and high costs of R&D effort. When providing credit, the lender assesses the creditworthiness of the borrower. She relies on financial data and market analysis. The financial data analysis reveals costs and the market outlook is linked to the uncertainty of future profitability. In this paper we examine whether the credit assessment behaviour of banks hurts firms of a more innovative sector more and how this affects long term innovative success and economic development. We use an evolutionary approach à la Nelson and Winter but with two sectors. A bank provides credit and supplies it to single firms based on a rating. We illuminate the impact of rating process characteristics on the long term outcome. When the bank does not distinguish for sector-specific features, such as risk and market outlook, the high-tech sector benefits over-proportionally because the surviving firms have a high profitability and further innovations are more likely. The way that the bank forms expectations about the market outlook influences the allocation of credit between sectors. The innovative sector is supplied more credit if the market outlook is assessed in a rather conservative fashion. The impact on aggregates however, is limited because the bank uses other pieces of information as well.
Firms often rely on external financing in order to conduct R&D. The question is to what extent discriminatory behaviour of the funds provider affects the industry evolution. The model is based on an evolutionary framework by Nelson and Winter. A firm chooses its R&D spending in an adaptive fashion where technological improvement is essential for survival in the competitive market. Firms can finance their activities by using retained profits or applying for credit. However, they have a clear hierarchy in choosing the source of funds and saved profits are always used up first. There is endogenous discriminatory lending as the banking sector provides credit according to firms' individual features. It compares profitability and market share across firms when assessing creditworthiness. The model is able to capture features of innovation and diffusion of technology. Results show that the availability of credit is crucial for technological change in a non-linear fashion and that the industry evolves faster if the bank values market share more in assessing creditworthiness.
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