Local Bank Financial Constraints and Firm Access to External Finance

months, pˆ it-T Ĉ it-T . Intuitively, this elasticity would measure the marginal sensitivity of bank loansat time t induced by an expansion in external financing occurred at t-T. The cumulativepercentage impact of a change in sources of capital on lending after s periods can be estimatedby adding the lagged elasticities β 1 through β s . Cumulative elasticities represent the totalpercentage increase in lending at time t+s relative to loans at time t, as a proportion of apercentage point increase in sources of capital at time t. Table V shows the estimated marginaland cumulative effects, standard errors and significance levels for up to 24 months (shown onlyfor each quarter for conciseness). The marginal effect with zero lags corresponds to thecontemporaneous elasticity reported in the baseline results.The estimates confirm that an expansion in external financing has a positive and significantinstantaneous effect on lending. The result also indicate that there is an additional incrementaleffect up to around three months after the expansion. The point estimate of β 3 in column 1(0.48, significant at 17% confidence) implies that lending expands by an additional $0.42 atmonth t+3 for each dollar of external financing received at t. The estimated cumulative effectsare all positive and remain significant up to 21 months after the expansion in available financing(columns 3 and 4). The average cumulative elasticity throughout the two year period is 1.3,which implies that total lending expanded on average by more than $1.2 per dollar of additionalexternal finance.The results taken together suggest that an expansion in the availability of finance will have asubstantial positive effect on the supply of credit of constrained banks. The lending response isquick: the bulk of the credit supply response occurs within one quarter of the shock to availablefinance. The lending response is also persistent and involves a multiplier effect, in the sense thattotal lending increases more than dollar for dollar with the expansion of available funds. 1328