Capital reallocation and liquidity

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. Terms of use: Documents in AbstractThis paper empirically investigates banks' investment allocations over the recent business cycle. I identify unsolicited deposit shocks resulting from unconventional energy development and estimate bank allocations of these deposits. In the pre-recession period, banks lend 38 percent of incremental deposits; however, during the downturn, banks favor liquid assets and lending allocations fall to 22 percent. Banks with low risk tolerance or less access to liquidity are particularly sensitive to the decline in economic conditions, choosing securities and cash, respectively. The findings identify significant heterogeneity in the willingness of banks to allocate capital during adverse times.

supporting

confidence: 71%

Bank Heterogeneity and Capital Allocation: Evidence from 'Fracking' Shocks

Plosser

2014

“…Since during economic downturns the dispersion in pro…t growth rates increases (as documented by Eisfeldt and Rampini 2006) there are more bene…ts of reallocating capital from less to more productive plants; moreover during recessions the opportunity cost of resources are typically low (plants are underutilized); these observations should imply that recessions are times of accelerated productivity enhancing reallocation. However in the Great Recession …nancial conditions worsened and hence the increase in credit market frictions could have had a negative impact on reallocation.…”

Section: Discussionmentioning

confidence: 99%

“…Some empirical studies tend to con…rm the procyclical nature of reallocation (contrary to the cleansing view of recessions, in which more capital should be liquidated in recessions). Among these, Eisfeldt and Rampini (2006) document that ‡ows of capital among …rms decrease during downturns. In Figure 1 I plot the series for reallocation using updated data to 2012.…”

Section: Measuring Misallocation Over the Business Cyclementioning

confidence: 99%

Capital Misallocation During the Great Recession

Nola

2016

“…Entrepreneurs compare their own relative price of capital goods, P K t A e t , with the resale and purchase prices of equity claims, 13 KM suggest that constraints on new equity issuances, θ, may arise when investment requires a (non-collateralizable) effort of the entrepreneurs to be put in place, as in Hart and Moore (1994). Similarly constraints on the ability to resell old assets, φ, can be justified assuming a certain degree of specificity of installed capital, or to the presence of reallocation costs (Eisfeldt and Rampini (2006)). Figure 7).…”

Section: Entrepreneursmentioning

confidence: 99%

Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations

Ajello

2011

I use micro data to quantify key features of U.S. firm financing. In particular, I establish that a substantial 35% of firms' investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, stylized banks enable trades of financial assets, directing funds towards investment opportunities, and charge an intermediation spread to cover their costs. suggests that the answer is 'yes'. I find that financial sector shocks account for 35% and 60% of output and investment volatility, respectively. These are the implications of a dynamic model estimated using the past 20 years of data for the United States.A key input into the analysis is a characterization of how important financial markets are for physical investment. To this end, I analyze the cash flow statements of all the U.S. public nonfinancial companies available in Compustat. I find that 35% of the capital expenditures of these firms is funded using financial markets. Of this funding, around 75% is raised by issuing debt and equity and 25% by liquidating existing assets. My analysis at quarterly frequencies suggests that the financial system is crucial in reconciling imbalances between the positive operating cash flows and capital expenditures.Shocks that affect the degree of efficiency of the financial system in allocating private savings to productive needs can have large effects on capital accumulation and aggregate activity. To quantify the effects of such disturbances on the business cycle, I build a dynamic general equilibrium model with financial frictions in which entrepreneurs, like firms in the Compustat dataset, issue and trade financial claims to fund their investments. The model builds on Kiyotaki and Moore (2008), henceforth KM. In my theoretical framework, trading of financial assets occurs through banks and exogenous shocks can affect the financial intermediation technology. Differently from KM, I assume that prices and wages are sticky and show that this feature of the model is key for the financial shock to generate procyclical movements in labor inputs, consumption and investment.In my model, entrepreneurs are endowed with random heterogeneous technologies to accumulate physical capital. Those entrepreneurs who receive better technologies issue financial claims to increase their investment capacity. Entrepreneurs with worse investment opportunities instead prefer to buy financial claims and lend to more efficient entrepreneurs, expecting higher rates of return than those granted by their own technologies.I introduce stylized financial intermediaries (banks) that bear a cost to transfer resources from entrepreneurs with poor capital accumulation technologies to investors with efficient capital production skills. Banks buy financial claims from investors and sell them to other entrepreneurs. In doing so, perfectly competitive banks charge an intermediation spread to cover their costs (Chari, Christiano, an...