Bank distress and firms’ investment during the Great Recession - evidence from Ireland

ABSTRACT

This article investigates the impact of bank distress on firms’ performance using unique data during the Great Recession for Ireland. The results show that bank distress, measured as banks’ credit default swap spreads (CDS), has negatively and statistically significantly affected firms’ investment expenditures. Interestingly, firms with access to alternative sources of external finance are not impacted by bank distress. The results are robust to accounting for external finance dependence, demand and trade sensitivities, which affect firm performance and the demand for credit.

KEYWORDS:

• Firm performance
• bank distress
• crisis

JEL CLASSIFICATION:

• D92
• G21

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Accounting for profitability does not change the results.

² See Claessens, Tong, and Wei (2012).

³ We use pre-crisis US firm data to alleviate possible endogeneity in estimation (similar controls were also used in Claessens, Tong, and Wei 2012, and are common in the literature).

⁴ Blundell and Bond (1998).