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  2. ASSA Annual Meeting
  3. 2022
  4. Preliminary Program
  5. Firm Performance during Crises
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Firm Performance during Crises

Paper Session

Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: Society for the Study of Emerging Markets
  • Chair: Jose Tessada, Pontifical Catholic University of Chile

The Economic Ripple Effects of COVID-19

Francisco Buera
,
Washington University
Roberto Fattal Jaef
,
World Bank
Andres Neumeyer
,
Torcuato Di Tella University
Hugo Hopenhayn
,
University of California-Los Angeles
Yongseok Shin
,
Washington University

Abstract

What are the effects of a temporary lockdown of the economy? Do firms' deteriorating balance sheets and labor market frictions propagate and prolong the effects? We answer these questions in a model with financial and labor market frictions. The model makes quantitative predictions about the effect of lockdowns of varying magnitude and duration on output, employment and firm dynamics. We find that the effects are not persistent if (i) workers on temporary layoff can be recalled by their previous employers without having to go through the frictional labor market and (ii) the government provides employment subsidies to firms during the lockdown. However, the effects are heterogeneous and young non-essential firms are disproportionately affected. In addition, if lockdowns lead to more permanent reallocation across industries, the recession becomes more protracted. Although the paper is motivated by the lockdowns during the Covid-19 pandemic, the framework can be readily applied to large, temporary shocks of different nature.

Bank Liquidity Provision across the Firm Size Distribution

Gabriel Chodorow-Reich
,
Harvard University
Olivier Darmouni
,
Columbia University
Stephan Luck
,
Federal Reserve Bank of New York
Matthew Plosser
,
Federal Reserve Bank of New York

Abstract

We use supervisory loan-level data to document that small firms (SMEs) obtain shorter maturity credit lines than large firms; have less active maturity management; post more collateral; have higher utilization rates; and pay higher spreads. We rationalize these facts as the equilibrium outcome of a trade-off between lender commitment and discretion. Using the COVID recession, we test the prediction that SMEs are subject to greater lender discretion by examining credit line utilization. We show that SMEs do not drawdown in contrast to large firms despite SME demand, but that PPP loans helped alleviate the shortfall.

The Distribution of Crisis Credit: Effects on Firm Indebtedness and Aggregate Risk

Federico Huneeus
,
Central Bank of Chile
Joseph P. Kaboski
,
University of Notre Dame
Mauricio Larrain
,
Financial Market Commission Chile and Pontifical Catholic University of Chile
Sergio L. Schmukler
,
World Bank
Mario Vera
,
Financial Market Commission Chile

Abstract

We study the distribution of credit during crisis times and its impact on firm indebtedness and macroeconomic risk. Whereas public policies can help firms in need of financing, they can lead to adverse selection from riskier firms and higher default risk. We analyze unique transaction-level data of both demand and supply of credit for the universe of banks and firms, combined with administrative tax data for all firms, for a large-scale program of public credit guarantees in Chile during the COVID-19 pandemic. Demand factors channel credit toward riskier firms, rapidly distributing 4.6% of GDP and increasing firm leverage. Despite the adverse selection on the extensive and intensive margins at the micro-level, macroeconomic risks remain small. Several mitigating factors contribute to this outcome: the small weight of riskier firms in the aggregate, the exclusion of the riskiest firms, bank screening, contained expected defaults, and the government absorption of tail risk.

Burning Money? Government Lending in a Credit Crunch

Gabriel Jiménez
,
Bank of Spain
José-Luis Peydró
,
Pompeu Fabra University and Imperial College London
Rafael Repullo
,
CEMFI
Jesús Saurina
,
Bank of Spain

Abstract

We analyze a small, new credit facility of a Spanish state-owned bank during the crisis,
using its continuous credit scoring system, its firm-level scores, and the credit register.
Compared to privately-owned banks, the state-owned bank faces worse applicants,
(softens) tightens its credit supply to (un)observed riskier firms, and has much higher
defaults, especially driven by unobserved ex-ante borrower risk. In a regression
discontinuity design, the supply of public credit causes: large positive real effects to
financially-constrained firms (whose relationship banks reduced substantially credit
supply); crowding-in of new private-bank credit; and positive spillovers to other firms.
Private returns of the credit facility are negative, while social returns are positive.
Overall, our results provide evidence on the existence of significant adverse selection
problems in credit markets.

Discussant(s)
Sebnem Kalemli-Ozcan
,
University of Maryland-College Park
Felipe Severino
,
Dartmouth College
Natalie Cox
,
Princeton University
Ricardo Correa
,
Federal Reserve Board
JEL Classifications
  • O1 - Economic Development
  • G2 - Financial Institutions and Services