Do Banks Lend to Distressed Firms?

RePEc Short ID: pfa225
ORCID iD: 0000-0002-3759-2172

Faria-e-Castro, Miguel; Paul, Pascal; Sanchez, Juan M.

Journal Article

Do Banks Lend to Distressed Firms?

Abstract: Concerns emerged during the COVID-19 pandemic over banks continuing to lend to unproductive businesses that were close to default. Recent research shows that lenders have incentives to offer relatively better terms to less-productive and more-indebted firms to recover their prior investments. U.S. loan-level data confirm the empirical relevance of such lending behavior. A rich model of firms and banks further emphasizes that this type of lending can also depress overall productivity by sustaining firms that should otherwise exit the economy.

Keywords: covid19; bank lending; firms; banks;