Research

Figure: share of borrowers in Belgium that are zombie firms:  our approach (in green) and OECD approach (in red).

Take-away: industry specialization gives banks an information advantage about firms in an industry. As such, they are better at identifying zombie firms and more informed about the negative impact that zombie firms exert on healthy firms. We show that specialized banks, as consequence, reduce lending to zombie firms faster than non-specialized banks.

Policy implication: specialization may mitigate zombie lending, making it easier for healthy firms to flourish and keeping bank balance sheets strong.

Figure: boxplot of our measure of bank sector specialization, conditional on how many sectoral factor loadings are statistically significant.  

Take-away: our measure of specialization increases as soon as a bank appears to be (over-)exposed to at least one sector. We then find that bank specialization is correlated with lower bank risk and lower systemic bank risk.

Research implication: bank stock return data can be used to infer meaningful (over-)exposures, that can in turn be used to construct measures such as a banks' level of specialization, its differentiation vis-à-vis other banks, or its interconnectnedness with other banks.

Figure: discouraged, applying and rejected firms (as % of total firms that expressed a need for bank loans)

Take-away: the amount of firms that are discouraged to apply is >> the amount of firms that get rejected (after applying). We then show that discouragement has strong negative effects on firm investments and growth, just like rejection.

Policy implication: to improve firms' access to finance overall, it may be more important to reduce discouragement than to reduce rejection. 

Figure: evolution of tangible assets of firms receiving innovation subsidies compared to matched control firms. Separately for firms in Knowledge Intensive Sectors (KIS) and the other sectors (1-KIS).

Take-away: innovation subsidies have sginificant positive effects on firm investments and growth, but the effects differ sharply across sectors.

Policy implication: excluding certain sectors from eligibility may maximize the impact of innovation subsidies.

Figure: the effects of credit supply shocks on employment documented in the literature for countries with varying strictness of EPL.

Take-away: the effect of credit supply on employment tends to be smaller in countries with stricter employment legislation.

Figure: aggregate volume of interbank funding (all banks active in Belgium, in EUR billion). The red lines correspond to our estimation period surrounding the collapse of Lehman Brothers.

Take-away: banks transmit interbank funding shocks to firms, but not equally across the board. Borrowers in industries where the bank is specialized (/has superior knowledge) or has a high market share (/has rent extraction possibilities) are relatively shielded. Safer borrowers are also relatively shielded. 

Policy implication: banks with high market share tend to charge borrowers higher interest rates, but during crises these borrowers enjoy better access to finance.

Figure: % of firms in Belgium borrowing from 1, 2, 3, 4, and 5 or more banks in any given year between 2002-2012, as well as the % loan volume that these firms represent.

Take-away: more than 80% of firms borrow from only 1 bank. Using firm-time fixed effects to disentangle credit demand from credit supply (Khwaja and Mian, 2008) requires firms to borrow from at least 2 banks --> implies throwing out >80% of firms representing >45% of credit. 

Research implication: Industry-Location-firm Size-Time (ILST) fixed effects may provide an alternative to Firm-Time (FT) fixed effects to disentangle credit demand from supply using also single-bank firms.

Figure: drivers of demand and supply of bank loans. 

Take-away: we propose an index based on the Age, Size, average Cash flow, and Leverage (ASCL) of firms to measure financial constraints of unlisted firms. 

Research implication: whereas popular measures such as the Kaplan-Zingales index, Whited-Wu index, and Hadlock-Pierce index may be especially suited to approximate financial constraints of listed firms, the ASCL index may be suited to approximate financial constraints of small and medium-sized firms.

Figure: firm performance and the financial environment. Figure based on Petersen and Rajan (1997).

Take-away: firms use the trade credit channel to manage growth. Firms that are more vulnerable to financial market imperfections, rely more on the trade credit channel to grow. The overall conditions of the financial market also matter for the importance of the trade credit channel.

Policy implication: financial development may reduce the need of (especially vulnerable) firms to rely on the trade credit channel to manage growth.