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|
|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.