Research

Cyclical Divergence in Corporate Lending and the Real Effects  [Most Recent] 

Using text analysis of loan agreements filed with the US Securities and Exchange Commission (SEC), this study offers a new perspective on the conventional view of uniformly procyclical loan activities by revealing distinct cyclical patterns - procyclical originations and countercyclical renegotiations - particularly during the Global Financial Crisis. The empirical evidence clarifies the underlying mechanisms, showing that firm financial characteristics drive these dynamics: weaker firms are more likely to renegotiate but less likely to secure new loans, a pattern that intensifies during the crisis. Despite more frequent renegotiations, loan terms remain procyclical, with lower loan amounts, higher spreads or shorter maturities limiting investment and deepening downturns. The impact on investment varies by firms' financial health, with riskier firms exacerbating declines during the crisis due to higher renegotiated interest rates, while healthier firms boosting investment in normal times due to improved terms. This heterogeneity highlights a cyclical asymmetry in the role of firm financial health: stronger firms lead investment during expansions, while weaker firms are crucial during contractions.