Discussion paper
DP19395 Do Banks Buffer Equity Market Shocks? Fire Sales Around the World and Corporate Financing
We posit that equity markets cannot fully differentiate between “fire-sales” triggered by redemptions and those caused by fundamental shocks, which leads to distorted price discovery and reduced stock liquidity. Thus, firms opt for the least information-sensitive type of external financing: non-market-based bank loans. To test this hypothesis, we use a comprehensive sample of global firms that includes detailed information on foreign institutional investor holdings. International fire-sales negatively impact foreign institutional ownership, stock liquidity, and market valuations. Firms exposed to international fire-sales reduce their equity financing, increase their leverage, and shift their debt structure toward bank loans.
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