What Hinders Investment in the Aftermath of Financial Crises: Balance-Sheet Mismatches or Access to Finance?

We utilize a new firm-level database from six Latin American countries between 1990 and 2005 to study the effect of financial crises on firms’ performance. The depreciated currency provides new investment opportunities in the tradeable sector. Yet firms may not exploit these prospects given decreased supply of credit as a result of failing banks and fleeing foreign investors. Firms might also become credit constrained if their reliance on foreign currency denominated debt before the crisis (and the associated currency mismatch on their balance-sheets) reduces their net worth after the depreciation. In contrast to the previous studies, we are able to differentiate between these two main sources of financial constraints. We do so by relying on firm level information not only on the share of debt denominated in foreign currency, but also on the export orientation and the ownership structure of the firm. Using a differences-in-differences methodology, we show that firms who hold short-term foreign currency denominated debt do worse only if they are domestic firms. Foreign owned firms do better both in terms of sales and investment than the domestic firms in the post-crisis period even if they hold foreign currency debt. We conclude that limited access to finance plays a critical role in hindering investment during crises. JEL Classification: E32, F15, F36, O16