DP7208 The Misfortune of Non-financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks

Author(s):	Hui Tong, Shang-Jin Wei
Publication Date:	March 2009
Keyword(s):	demand shock, financial crisis, liquidity constraint
JEL(s):	G2, G3
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7208

If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, making use of a measure of a firm's financial constraint based on Whited and Wu (2006) and another measure of sensitivity to a demand shock, and apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the plight of non-financial firms.