Bank health, lines of credit, and corporate investment: evidence from the Great Recession

We study whether and how bank health affects corporate investment during the Great Recession. Using loan-level data, we find that firms obtain fewer lines of credit from less healthy lenders during the crisis among participants in the firms' last precrisis credit line syndicate, supporting the transmission of bank liquidity shocks to firms. However, bank health has heterogeneous treatment effects on corporate liquidity and investment. Bank health has a strong positive impact on lines of credit growth and investment growth only for firms with precrisis lines of credit maturing in the crisis, and the effect is concentrated in smaller firms and firms with weaker banking relationships. Thus, the transmission is arbitrary and uneven based on the timing of lines of credit instead of firm quality. We conclude that lines of credit play a significant role in transmitting bank liquidity shocks to firms, especially important given recent events and how quickly contagion can occur.