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This article explores the effect of a bank’s failure on its client firms using the 1998 bankruptcy of a middle-sized Estonian bank. The firms studied in this article are privately held and do not rely on public equity. The performance of the firms receiving credit from the failed bank is compared to that of a matched set of other firms. The client firms are found to be more likely to fail after their bank’s failure even after controlling for firm characteristics before the event. A decrease in the liquidity of the client firms is also detected just after a bank failure, suggesting that the loss of liquidity may be the linkage between a bank failure and the failure of the clients. JEL Classification: G14, G21, G3

Does Bank Failure Affect Client Firms? Micro Evidence from Estonia