Trade and Financial Channels as the Transmission Mechanism of the Financial Crisis

We examine the propagation mechanisms of the US financial crisis that erupted in 2008 on the Asian economy, which was tightly linked to the US through exports and financial relationships. While two possible propagation channels, trade and financial channels, are identified in previous literature, the channels are not well analyzed since they rely on the aggregated datasets. Employing a firm-level dataset with the exporting information of Asian firms, we find the following empirical results. First, while the trade channel temporarily influenced the financing behavior of Asian firms exporting to the US, it had no or weak influence on cash holding and investment behavior. Second, the financial channel influenced the financing behavior of Asian firms, especially those with less availability of outside financing, through reductions in cash holding or investment behavior. Our results indicate the importance of financial system stability for preventing the contagion of a crisis