Verifying the State of Financing Constraints: Evidence from U.S. Business Credit Contracts

Economics

Speaker:Ralf Meisenzahl, Federal Reserve Board
Date: Wednesday 21 March 2012
Time: 16.15
Location: STC/D

Further details

Many policy makers are concerned that tight financing constraints for small businesses are stalling the recovery from the Great Recession. This paper empirically assesses two agency problems commonly used to motivate financing constraints - one resulting in a "firm balance sheet channel" and one resulting in a "bank balance sheet channel." Evaluating specific models of these two agency problems against a comprehensive data set of U.S. small business credit contracts, I find strong support for the firm balance sheet channel but only little support for the bank balance sheet channel. A complementary regression analysis confirms this result. Hence, to support small business lending, policies seeking to improve firms' balance sheets may be more effective than providing additional capital to banks.