From the financial crisis to the real economy: Using firm-level data to identify transmission channels

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Abstract

Using accounting data for 7722 non-financial firms in 42 countries, we examine how the 2007–2009 crisis affected firm performance and how various linkages propagated shocks across borders. We isolate and compare effects from changes in business cycle, international trade, and external financing conditions, on firms' profits, sales and investment using both sectoral benchmarks and firm-specific sensitivities estimated prior to the crisis. We find that the crisis had a bigger negative impact on firms with greater sensitivity to business cycle and trade developments, particularly in countries more open to trade. Interestingly, financial openness made limited difference.

Highlights

► We study how the 2007–09 crisis affected firms' profits, sales and investment. ► We isolate effects from changes in business cycle, international trade, and financing conditions. ► We further examine how various linkages propagated shocks across borders. ► The crisis had a bigger negative impact on firms with greater sensitivity to business cycle and trade. ► Trade openness propagated shocks, while financial openness made limited difference.

Introduction

The 2007–2009 crisis that originated in the United States shocked the core of the global financial system. It led to a sharp drop in international trade in goods and services to a degree not seen since the end of WWII and triggered a global recession unparalleled since the Great Depression. A small literature is emerging that studies the (channels of) transmission of the latest crisis across national borders and the role of country differences in how the economies were affected. The evidence from these studies on the roles of linkages and country differences is mixed. Claessens et al. (2010), Blanchard et al. (2010), and Cetorelli and Goldberg (2011) document evidence that countries more integrated with global financial markets suffered greater output losses during the crisis.1 In contrast, Rose and Spiegel (2010 and 2011) fail to find strong evidence that country factors, including bilateral trade and financial linkages with the U.S., are associated with how the crisis impacted individual countries.2

All these studies rely on aggregate macro data. The mixed evidence on the role of specific contagion channels and country factors is perhaps not surprising since macro data reflect the aggregation of multiple underlying factors. The crisis likely spread through a combination of real (e.g., trade) and financial channels, as well as by affecting expectations of consumers and firms, which in turn changed consumption and investment behaviors. The existing literature has attempted to distinguish these channels by including proxies for trade or financial integration (see Rose and Spiegel, 2010, Rose and Spiegel, 2011, Milesi-Ferretti and Lane, 2010). However, these proxies tend to be highly correlated with each other and hence do not allow for a clean separation of the different channels. For example, both a reversal of capital flows and a reduction in demand for exports can induce a worsening of corporate sector performance or a contraction in investment.

To make progress, one could employ firm-level micro data. If different transmission channels imply different firm-level effects related to firm characteristics (e.g., more finance-dependent firms versus more trade-dependent firms), one has a better chance to isolate and quantify the different channels. Such information is lost in the aggregate data. The first firm-level analysis to study how crises (in emerging markets) spread to other markets was conducted by Forbes (2004).3 For the 2008–2009 crisis, micro firm-level evidence is relatively scarce, partly because firm-level data for many countries are only released with long lags.4

One substitute that has been used to date is stock market data, as Tong and Wei (2011) do. They report evidence of liquidity crunches across emerging economies by showing that the decline in stock prices was more severe for firms that intrinsically are more dependent on external finance for working capital over the period from July 2007 to the end of 2008.5 Due to lack of appropriate data at the time, they were not able to show the impact of the financial crisis on actual firm investment and performance.

In this paper, by using actual firm-level balance sheets and income variables, and investigating these effects for a large number of countries affected by the crisis, we complement and expand this research. While firm-level data offers richer information than aggregate data, there are caveats to bear in mind. First, since the data cover publicly listed firms only, we cannot claim that results are representative of the whole economy. Second, because firm coverage varies by country, one has to check that the results are not driven by variations in the country coverage (which we do).

In the remainder of the paper, we discuss in Section 2 the framework that guides our empirical tests. In Section 3, we describe the sources of the data and the definitions of our key variables and in Section 4 present our empirical results. Finally, in Section 5 we conclude.

Section snippets

The framework

Our goal is to use firm-level data to improve our ability to distinguish different transmission channels through which the financial and economic crisis in the U.S. and other advanced countries affected the rest of the world. We examine three possible channels: a business cycle channel, a trade channel, and a financial channel.

We employ a consistent framework to distinguish the impacts of these three channels. To isolate transmission through the business cycle channel, we make use of the

Data sources, variables, and basics statistics

We obtain annual data from Worldscope on the balance sheet, cash flow and income statements for all listed, non-financial manufacturing companies. The data cover 42 advanced countries and emerging markets (note that the U.S. is excluded as it was both the source of the financial crisis and the country whose data are used to define the sector characteristics used below). The number of listed manufacturing firms by country for the last year of the sample (2009) is presented in Table 1. (Our

Empirical results

  • i

    Baseline results

    We start with our basic regression, which examines how various sector features relate to changes in firm performance during the crisis. These results are reported in Table 3. As our explanatory variables are at the sector level, we cluster the standard errors by sector.

    In Column 1, we look at the impact of the crisis on the changes in firms' profit/asset ratios. We find the change in profits to be more pronounced for those sectors that are intrinsically more sensitive to

Conclusions

In this paper, we apply a simple and well-established methodological framework to study the real impacts of the 2008–09 crisis on firm-level performance and the role of global linkages in transmitting the crisis. We analyze three channels through which the crisis may have affected firms: a business cycle channel, a trade channel, and a financial channel. To investigate the business and trade channels, we asked the question: if we characterize firms based on their intrinsic sensitivity to

Acknowledgments

We would like to thank the participants in the NBER Global Financial Crisis preconference and conference and especially Charles Engel, Kristin Forbes, Jeffrey Frankel, Linda Tesar, and the referees for very useful comments and suggestions, and Mohsan Bilal for excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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