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RFS Advance Access published online on October 13, 2007
Review of Financial Studies, doi:10.1093/rfs/hhm045
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel

Jie Gan
Hong Kong University of Science and Technology

Address correspondence to Jie Gan, Department of Finance, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, or e-mail: jgan{at}ust.hk

JEL: G21, C41


  Abstract

This article studies how a shock to the financial health of banks, caused by a decline in the asset markets, affects the real economy. The land market collapse in Japan provides an ideal testing field in separating the impact of a loan supply shock from demand shocks. I find that banks with greater real estate exposure have to reduce lending. Firms' investment and market valuation are negatively associated with their top lender's real estate exposure. The lending channel is economically important: it accounts for one-third of lending contraction, one-fifth of the decline in investment, and a quarter of value loss.

I thank Kalok Chan, Murillo Campello, David Cook, Joseph Fan, Jun-Koo Kang, Yasushi Hamao, Peter Mackay, Stewart Myers, Joe Peek, Eric Rasmusen, David Scharfstein, Jeremy Stein, Bent Vale, Hao Wang, and conference participants at the 2004 Financial Intermediation Research Society Conference, the 2005 RFS-IU Conference on The Causes and Consequences of Recent Financial Market Bubbles, the 2005 City University of Hong Kong Finance Symposium, and the 2005 EFA Conference for helpful comments. I also thank Carol Tse and Crystal Cheung for able research assistance and Virginia Unkefer for excellent editorial assistance. I acknowledge the financial support from the Hong Kong RGC Research Grant (HKUST6280/04H). This paper was previously titled "How Does a Shock to Bank Health Unrelated to Firm Performance Affect Firm Performance?"


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