Local Bank Financial Constraints and Firm Access to External Finance

amount of finance available to them. I look at whether borrowers’ total bank credit increaseswhen their lender institutions experience an expansion in external financing with the followingspecification:ln(Debt kt ) – ln(Debt kt-1 ) = α k + α t + ρ F ( lnF kt – lnF kt-1 ) + υ kt(IV-6)Each observation corresponds to a firm k at time t in the sample period and Debt kt is thetotal bank debt of firm k aggregated across all banks at t. The independent variable of interest isthe change in bank sources of capital averaged across all lenders of firm k at time t. It isinstrumented with the change in log expected external finance, pˆ kt Ĉ kt , also averaged across alllenders. α k and α t are firms and month fixed effects. The parameter ρ F represents the sensitivityof firm k’s total bank debt to a shock to the external finance of any of firm k’s lenders’,controlling for all time invariant firm characteristics. The estimated sensitivity of the amount ofbank finance of a firm to an increase in available external finance to a lender is positive andsignificant (column 1 of Table VII). The estimated coefficient indicates that a 1% increase inbank external finance leads to an average expansion of debt across borrowers of 0.3%. Thepoint estimate is consistent with previous results: it implies that an increase in $1 of externalfinance leads to an expansion of $0.73 in aggregate bank credits to firms. 15The firm level specification has two potential caveats. First, the standard error estimationdoes not allow for clustering at the bank level which leads to underestimate their magnitude.And second, if firm investment opportunities are time varying and banks lend to firms withbetter investment opportunities, the estimated ρ F will have an upward bias. To address theseissues I look in loan level specification at whether the amount of debt of firm k from bank ithat receives an external financing shock, increases relative to the amount borrowed by the samefirm k from other financial institutions:32