Do Banks Affect the Level and Composition of Industrial Volatility?
Article first published online: 3 AUG 2006
The Journal of Finance
Volume 61, Issue 4, pages 1897–1925, August 2006
How to Cite
LARRAIN, B. (2006), Do Banks Affect the Level and Composition of Industrial Volatility?. The Journal of Finance, 61: 1897–1925. doi: 10.1111/j.1540-6261.2006.00892.x
- Issue published online: 3 AUG 2006
- Article first published online: 3 AUG 2006
In theory, better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions. This paper finds that the volatility of industrial output is lower in countries with more bank credit. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is reduced less strongly. Volatility dampening is achieved via countercyclical borrowing: At the firm level, short-term borrowing is less (or more negatively) correlated with sales and inventories in countries with high levels of bank credit.