Can Central Banks Boost Corporate Investment? Evidence from the ECB Liquidity Injections

While it is well documented that corporate investment decreases during a liquidity crunch, the effect of a liquidity injection is much less studied. In this paper, we analyze firm-bank level data to examine the largest liquidity intervention in history: the LongerTerm Refinancing Operations (LTROs) by the European Central Bank (ECB). We show that, contrary to the intended result of improving real economy, more LTRO funds to banks are associated with lower corporate investments. Riskier banks took more funds from ECB through the LTRO and subsequently increased their holdings of risky sovereign debt. Our findings reveal the difficulty of boosting corporate investment through central bank injection of liquidity into the banking system when bank balance sheets are impaired.