Trade and financial channels as the transmission mechanism of the financial crisis

We examine the impact of the propagation mechanisms of the U.S. financial crisis that erupted in 2008 on the Asian economy, which was tightly linked to the U.S. through exports and financial relationships. Although two channels, the trade and financial channels, are proposed in the previous literature, the channels are not well analyzed as these studies rely on aggregated data. Rather, we use detailed firm-level data that enables us to identify the level of heterogeneity in Asian firms. First, we find that while the trade channel temporarily influences the financing behavior of Asian firms exporting to the U.S., this channel has no influence on cash-holding and investment behavior. Second, the financial channel influences the financing behavior of Asian firms with less available outside financing by leading them to reduce their cash holdings or investments. Our results indicate the importance of financial system stability in preventing the contagion of a crisis.