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Corporate Resilience to Banking Crises: The Roles of Trust and Trade Credit

  • Ross Levine, Chen Lin and Wensi Xie
Abstract

Are firms more resilient to systemic banking crises in economies with higher levels of social trust? Using firm-level data in 34 countries from 1990 through 2011, we find that liquidity-dependent firms in high-trust countries obtain more trade credit and suffer smaller drops in profits and employment during banking crises than similar firms in low-trust economies. The results are consistent with the view that when banking crises block the normal bank-lending channel, greater social trust facilitates access to informal finance, cushioning the effects of these crises on corporate profits and employment.

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Corresponding author
*Levine (corresponding author), rosslevine@berkeley.edu, University of California Berkeley Haas School of Business, Milken Institute, and National Bureau of Economic Research (NBER); Lin, chenlin1@hku.hk, University of Hong Kong Faculty of Business and Economics; and Xie,wensixie@cuhk.edu.hk, Chinese University of Hong Kong CUHK Business School.
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1

We thank Franklin Allen, Thorsten Beck, Craig Doidge, Jefferson Duarte (the referee), Andrew Ellul, Itay Goldstein, Gary Gorton, Jun-Koo Kang, Yoonha Kim, Florencio Lopez-de-Silanes, Michelle Lowry, Paul Malatesta (the editor), Luigi Zingales, and the seminar participants at the Wharton School for their helpful comments and suggestions. Xie thanks Franklin Allen for hosting her visit at the Wharton Financial Institutions Center. Part of the research was conducted during her visit at Wharton as a Fulbright scholar.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
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