Number of creditors and the real effects of credit supply disruptions

Abstract

This paper examines the role of bank-firm relationships in transmitting credit supply shocks to the real side of the economy in an emerging market. Using a hand-collected dataset for Iranian public companies, we exploit firms' exposure to a bank involved in a massive Ponzi scheme in 2011. We document a nearly 8 percentage point drop in annual employment growth rate for firms connected to the troubled bank following the credit dry-up caused by the scandal. We show that the magnitude of the effect on employment and investment is amplified by bank-firm relationship at least as much as by the financial constraint status found in previous studies. The results highlight the role of bank-firm relationships and the importance of access to multiple creditors in alleviating the consequences of credit supply disruptions.