Credit Supply and (In)organic Growth

We document a major mechanism – inorganic growth – which drives a wedge between micro-study effects of credit supply shocks and aggregate effects. Exploiting a quasi-exogenous positive shock to credit supply, we document that affected firms borrow larger amounts and exhibit stronger asset, employment, and sales growth.All growth effects, however, are inorganic, and the quality of the credit-supply-induced acquisition activity is low. The market for inorganic growth is large, accounting for 4% of GDP, and we therefore argue it is important to look at inorganic growth in any study that is interested in understanding aggregate effects of financial frictions. We provide a method for adjusting for inorganic growth components empirically that is generally applicable beyond our specific setting