Bank lending and firm activities: Overcoming identification problems

Abstract

This chapter presents an overview of the extant literature on the real impact of financial constraints, with a particular focus on financial constraints originating from adverse shocks to bank lending. While there has been significant progress in theoretical research on the causal link between negative fund supply shocks and various firm activities, there are relatively few empirical studies that successfully identify loan supply shocks. The first part of this chapter reviews the large body of literature on this topic and details how recent studies have attempted to overcome the important identification challenge of disentangling fund supply and demand shocks. Following the discussion of various attempts to overcome this challenge ranging from the use of natural experiments to the employment of extensive panel datasets, two studies by the authors of this chapter are discussed in detail, which employ a natural disaster in Japan as a natural experiment to examine the real impact of financial constraints on the capital investment and export behavior of firms.