The impact of reduced credit availability on corporate investment

: an analysis of portuguese non-financial corporations

Abstract

The recent slowdown in bank lending may be amplifying the downturn of the Portuguese economy. A crucial question is to understand whether the decline in credit growth is associated with the supply or with the demand side of the market. The goal of this MSc thesis is twofold. Firstly, I want to understand how the Portuguese firms are dependent on external borrowing and the contribution of bank lending to fulfill the financing needs of the economy. Then, I attempt to measure the effects of disturbances in the bank lending channel on the real economy and for this purpose I analyze how corporate investment reacts to increases in firms’ financing costs. I show that the economy relies heavily on external capital. Further, using microdata on firms’ balance sheets and credit default swaps on Portuguese government debt to instrument shocks to the credit supply, I find some evidence that more financially constrained firms contract more their investment expenditures. Finally, I conclude by stating the importance of a stable and robust banking system for the recovery of the economy.

Date of Award	Jun 2012
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Isabel Horta Correia (Supervisor) & Geraldo Cerqueiro (Supervisor)