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Foreign Lenders and the Real Sector
Author(s) -
FERRARIS LEO,
MINETTI RAOUL
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2007.00052.x
Subject(s) - market liquidity , business , liberalization , monetary economics , financial system , finance , economics , market economy
We develop a theory of the interaction between the entry of lenders and the real sector. The high liquidation skills of incumbent lenders render them too tough in terminating high‐risk/return projects. Being “foreign” to the market, newcomers have lower ability to liquidate than incumbents. This makes them softer in liquidating high‐risk/return projects but renders their funding more costly. We show that the entry of lenders and the share of high‐risk/return projects can reinforce each other through firms' liquidation values. This interaction dampens the output impact of liquidity shocks. Hence, financial liberalization can enhance stability.