How Did Financial Development Affect the Performance of European Firms Before and After the 2008 Credit Crisis?

The recent credit crisis led to a serious downturn in the United States and the rest of the world. This article analyzes the relationship between the crisis and financial development based upon European firm-level data. It studies how the level of financial development interacts with a firm's dependence on external financing, as well as its size and age, in determining a firm's earnings. It also tries to identify which factors explain the spread of shocks and their impacts on different firms during the crisis period. The results show that financial development is positively related to a firm's earnings. Surprisingly, however, it can also exacerbate the impact of a crisis.