How Much Do Idiosyncratic Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data

Abstract

We show that supply-side financial shocks have a large impact on firms' investment. We develop a new methodology to separate firm-borrowing shocks from bank-supply shocks using a vast sample of matched bank-firm lending data. We decompose aggregate loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). We show that idiosyncratic granular bank-supply shocks explain 30-40 percent of aggregate loan and investment fluctuations.

The Real Effects of Credit Supply: Review, Synthesis, and Future Directions

“…Amador and Nagengast (2016) utilize the same methodology using loan level data collected from the Portuguese credit register for the period between 2005-2013. They find that granular bank shocks explained about 20-40% of Portuguese investment, which is marginally lower than the effect found by Amiti and Weinstein (2018). As argued by Amador and Nagengast (2016), this indicates that firm-specific factors together with economy-wide shocks may have been a slightly bigger influence on aggregate investment in Portugal than in Japan for the given sample periods.…”

“…If firms cannot offset reductions in credit supply by switching to other lenders or by tapping into other financing sources, they may have to reduce investment (e.g., Peek and Rosengren, 2000;Gan, 2007;Almeida et al, 2011;Amiti and Weinstein, 2018;Cingano et al, 2016;Acharya et al, 2019).…”

“…Empirical research utilizing loan-level matched data also contains examples of studies employing different identification strategies than the aforementioned ones. In their seminal work, Amiti and Weinstein (2018) develop a novel methodology, estimating the firm-time fixed effects model from loan-level data through the weighted least squares (WLS) procedure, to identify idiosyncratic credit supply effects which enable to draw aggregate inferences. They apply this methodology for a sample of listed Japanese firms between 1990-2010, and find that idiosyncratic granular credit supply shocks accounted for around 30-40% of the variation in aggregate investment in Japan.…”

“…Despite its advantages and popularity, however, it comes with two important limitations. It is unable to identify aggregate equilibrium outcomes and it is not applicable when firms borrow from only one lender; these limitations are addressed by, respectively, Amiti and Weinstein (2018) and Degryse et al (2019).…”

“…In terms of real outcomes, the literature focuses primarily on investment and employment. Extant research exploiting negative shocks to credit supply documents that reductions in credit supply translate into an overall decline of firms' investment (e.g., Cingano et al, 2016;Amiti and Weinstein, 2018) and employment (e.g., Chodorow-Reich, 2013;Bentolila et al, 2017). In addition, it has also been shown that negative effects of credit supply are also reflected in firms' valuation (e.g., Gan, 2007), firms' export growth (e.g., Paravisini et al, 2014) as well as sales growth (e.g., Acharya et al, 2018).…”