Scandinavian Working Papers in Business Administration
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2012/11: Credit supply shocks, financial constraints and investments for small and medium-sized firms
Ove Rein Hetland () and Aksel Mjøs ()
Additional contact information
Ove Rein Hetland: Ernst & Young Transaction Advisory Services, Stavanger, and Institute for Research in Economics and Business Administration (SNF), Postal: Ernst & Young Transaction Advisory Services, Vassbotnen 11a Forus, P.O. Box 8015, N4068 Stavanger, Norway
Aksel Mjøs: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Abstract: In this paper, we find that reduced credit supply reduces firm investments in our sample of small private firms. The effect is strongest for the least financially constrained firms. We use a representative survey of identified Norwegian firms that is linked with financial, bank account and ownership data, and take advantage of the financial crisis in 2008–9 as a natural experiment. We examine several potential explanations for our findings, asking: (i) did the financially constrained firms hedge against potential future credit supply shocks? (ii) did they have better access to shareholder funding? or (iii) was the effect driven by past investment patterns? We find that access to shareholder funding during the crisis offset the differences in the effects of reduced credit supply on investments across conventional financial constraint categories. The findings suggest that only examining the correlation between credit supply and investments for the ex ante most financially constrained firms during economic downturns is unlikely to capture the full dynamics of the credit channel on the business cycle.
Keywords: Financial constraints; Corporate Investment; Bank credit; Private firms; Financial crisis
47 pages, First version: September 28, 2012. Revised: March 30, 2018.
Full text files
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