Cyclicality of credit supply: Firm level evidence

We quantify fluctuations in bank-loan supply in the time-series by studying firms' substitution between loans and bonds using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on the issuance of new debt, we interpret firms' switching from loans to bonds as a contraction in bank-credit supply. We find strong evidence of this substitution at times that are characterized by tight lending standards, depressed aggregate lending, poor bank performance, and tight monetary policy. We show that this substitution behavior has strong predictive power for bank borrowing and investments by small firms. •We propose a time-series measure of bank-loan supply conditions.•Firm substitution between loans and bonds is the best measure of conditions of loan supply.•This measure is a strong predictor of conditions of loan supply for small, out-of-sample firms.•This measure also predicts investments for small firms.