Credit shocks to micro and small firms: evidence from the Great Recession

Mon, 10/18/2021 - 13:00 / 14:00

405, Viale Romania

Speaker: Megha Patnaik , Luiss

How did credit shocks in the Great Recession affect small business financing? I use novel data from a leading online accounting software in the US to measure firms' responses to bank failures and collateral price movements during the Great Recession. Bank failures are associated with declines in credit for small firms but not micro firms. In contrast, movements in house prices are associated with credit for micro firms but not small firms. This suggests differences in how firms overcome asymmetric information in credit markets, with micro firms depending more on housing collateral and small firms on lending relationships. I build a dynamic model where firms bear the costs of borrowing, and sort into collateralized and relationship-based credit by size, consistent with my empirical findings.