Solomiya Shpak (Kyiv School of Economics and National Bank of Ukraine) - Finance, Employment, and Survival: Evidence from Bank Liquidations in Ukraine

Co-authors: John S. Earle (George Mason University) and Scott Gehlbach (University of Chicago)

Abstract:
How important is a relationship with a bank to a firm’s performance and survival? If firms can easily switch among different sources of credit supply, then the loss of any one source may have little implication for the firms that have borrowed from that source. However, to the extent that relationships are sticky so that switching is costly, then the loss of the credit source may negatively impact firms, reducing growth and survival. We study this question using unprecedented banking sector reform that resulted in the liquidation of 104 banks in Ukraine between 2014 and 2019. Using monthly loan-borrower data from the National Bank in Ukraine and combining them with annual firm-level financial statements data, we trace the employment dynamics and survival of the firms whose main bank has been liquidated between 2014 and 2019. Our results suggest that bank liquidations resulted in around 13 percent employment decrease in the first post-liquidation year and amounted to 26 percent over the five years following the liquidation. We also find that affected firms were 14 percent less likely to survive through 2019, controlling for firm size, productivity, and industry fixed effects.

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