| The goal of this dissertation is to empirically examine the access to bank credit of small and medium sized firms during a recessionary period. The premise has been that adverse shocks weaken borrowers' financial position, which further reduces their access to credit. This so-called propagation mechanism is presumed to amplify initially small shocks into outsized contractions. This dissertation presents evidence that seems inconsistent with these implications and suggests an alternative solution to the “small shocks, large cycles” puzzle. I find that local banks allocate credit to sectors of the economy that are particularly affected by the recession, probably to make their long-run investments more viable. However, this is not the case of borrowers with nonperforming loans who seemed to face severe liquidity constraints during recessions. I empirically study whether close and exclusive firm-bank relationships with local banks help to overcome liquidity constraints faced by firms in financial distress. Consistent with other studies, I find that firms related to a single (local) bank are able to obtain more funds and are less likely to default on their debt. |
