While the protracted business slump since the global financial crisis (GFC) has been a demand-side factor driving down credit growth in the corporate sector, corporate restructuring, tighter financial regulations, and the concentration of lending in the household sector may have posed financial constraints to firms by reducing credit supply. Discussion of corporate financial constraints generally emphasizes their negative effects of curbing investment and hampering long-term productivity growth. However, there has recently been growing interest in their positive aspect of improving the efficiency of resource allocation by facilitating the exit of low-productivity firms (“cleansing effect”). In this regard, it would be appropriate to examine how post-GFC changes in credit conditions affected corporate financial constraints and look at the implications for productivity.
In this paper, we analyze financial constraints for Korean manufacturers using corporate financial statements (KIS-value DB) between 2008 and 2018. Financial constraints for companies are estimated based on the difference-in-difference approach. The results show that Korean manufacturers experienced financial constraints during the period between 2009 and 2011 and in 2017. The backgrounds behind these results are as follows. After the GFC, market interest rates rose sharply and financial institutions became more conservative in their lending practices as their financial soundness deteriorated. Whereas in 2017, the financial condition is characterized by a combination of (i) reduced credit supply due to the rise in credit risk and tightened financial regulations and (ii) the growth in corporate fund demand in line with the global economic recovery. By size, small- and medium-sized companies were affected more by financial constraints than large ones during both periods. By productivity level, financial constraints for low-productivity firms were greater than for high-productivity ones between 2009 and 2011, while in 2017 constraints for low-productivity firms were estimated to be insignificant. This implies that the cleansing effect of financial constraints might have recently weakened.
The analysis results show that corporate credit policy should not stop at simply easing financial constraints, but should aim to enhance the efficiency of resource allocation and minimize the negative impacts of financial constraints such as contraction in investment, through strengthening the loan screening process of financial institutions.