How Did Financial Development Affect the Performance of European Firms Before and After the 2008 Credit Crisis?

Abstract

The recent credit crisis led to a serious downturn in the United States and the rest of the world. This article analyzes the relationship between the crisis and financial development based upon European firm-level data. It studies how the level of financial development interacts with a firm’s dependence on external financing, as well as its size and age, in determining a firm’s earnings. It also tries to identify which factors explain the spread of shocks and their impacts on different firms during the crisis period. The results show that financial development is positively related to a firm’s earnings. Surprisingly, however, it can also exacerbate the impact of a crisis.

Keywords:

• credit crisis
• financial development
• firm performance
• monetary policy
• perceived inflation

ACKNOWLEDGMENTS

This article is based on the second chapter of my dissertation at the University of Southern California. I thank Robert Dekle, Jeff Nugent, Vincenzo Quadrini, and two anonymous referees for their useful comments and suggestions. All remaining errors are my own.

Notes

¹ The thirty sample countries are included in the empirical analysis: Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Iceland, Italy, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Norway, Poland, Portugal, Russian Federation, Slovenia, Slovakia, Spain, Sweden, Switzerland, Ukraine and United Kingdom.

² Since Norway does not have this information, it, too, is excluded from the analysis.

³ Earnings before interest and taxes are covered most comprehensively in this database. This variable, in addition, represents the amounts of profits or earnings, which may reflect current market conditions. For these two reasons, I chose EBIT as the dependent variable for use in this article.

⁴ When we use a fixed-effects model, we cannot estimate country-specific or industry-specific effects.

Additional information

Notes on contributors

Mihye Lee

Mihye Lee is an Economist on the Monetary and Financial Economics Team for the Economic Research Institute at The Bank of Korea