Abstract
We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms - particularly those with strong business or political ties - completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1413-1442 |
| Number of pages | 30 |
| Journal | American Economic Review |
| Volume | 98 |
| Issue number | 4 |
| DOIs | |
| State | Published - Sep 2008 |
| Externally published | Yes |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics