Working Paper: CEPR ID: DP17508
Authors: Gregor Burle; Sarah Lein; Elizabeth Steiner
Abstract: Based on a large panel of balance sheets and income statements of Swiss nonfinancial firms from 1998 to 2016, we estimate the sensitivity of the cost of external finance to firm net worth using exogenous variation in net worth. We find that firm net worth is inversely related to the external finance premium, consistent with models featuring financial frictions as in Bernanke, Gertler, and Gilchrist (1999). Through the lens of their costly state verification setup, we provide a range for the monitoring cost implied by our estimated sensitivity of the cost of external finance to net worth. Our implied estimate of the monitoring cost ranges between 15 and 20 percent, consistent with an economically significant financial friction.
Keywords: external finance premium; net worth; firm-level balance sheet data; costly state verification
JEL Codes: E32; E22; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm net worth (G32) | external finance premium (G15) |
| net financial income (G29) | firm net worth (G32) |
| net nonoperating income (L39) | firm net worth (G32) |
| firm net worth (G32) | contractual interest rate (E43) |
| external finance premium (G15) | contractual interest rate (E43) |