Working Paper: CEPR ID: DP7208
Authors: Hui Tong; Shangjin Wei
Abstract: If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, making use of a measure of a firm's financial constraint based on Whited and Wu (2006) and another measure of sensitivity to a demand shock, and apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the plight of non-financial firms.
Keywords: demand shock; financial crisis; liquidity constraint
JEL Codes: G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in liquidity constraint (E51) | decline in stock price (G17) |
| increase in demand sensitivity (D12) | decline in stock price (G17) |
| financial constraints (H60) | stock price performance (G12) |
| demand sensitivity (R22) | stock price performance (G12) |