Bank shocks and firm performance: New evidence from the sovereign debt crisis

Prior empirical investigations of corporate failures consider the effects of macroeconomic conditions and financial health, but the literature contains limited evidence of the real effects of the bank shocks caused by the sovereign debt crisis. Using a rich source of high-quality firm-bank matched data for 2005-2014, this study examines the real effects of bank shocks on firms' survival prospects in Portugal. We first present evidence that a funding outflow is associated with a reduction in the credit supply. Furthermore, firms borrowing from banks exposed to the funding outflow are more likely to fail. We also uncover significant heterogeneity in firms' financial positions and show that the negative effect of a funding shock is stronger for younger, higher-risk firms, and those that used their potential lines of bank credit.