Financial Crises, Financing Sources, and Default Risks

We examine the mechanism through which a financial crisis affects the default risk of real economy firms. Specifically, firms with strong dependence on bank financing suffer higher increases in default risk than firms with no such dependence. Conversely, firms relying solely on financing from public-debt markets do not experience significant increases in default risk. These findings suggest that the bank supply shock theory helps to understand the transmission channel of shocks from the financial sector to the real economy. Finally, bank-dependent firms cannot completely offset adverse impacts stemming from bank-lending supply shocks by substituting bank loans with publicly traded debts