Firm net worth, external finance premia, and monitoring costs: estimates based on firm-level data

The sensitivity of the external finance premium to firms’ net-worth-to-capital ratio is central to the strength of the financial accelerator, yet direct firm-level evidence remains scarce. We estimate this elasticity using balance sheet and income statement data for Swiss nonfinancial firms over 1998–2016. To address the endogeneity of net worth, we employ two complementary instrumental variable strategies: one based on firms’ nonoperating income and the other a shift–share design that interacts predetermined exposure to financial income with aggregate dividend returns. Mapping the estimated elasticity into the costly state verification framework as implemented by Bernanke et al. yields structural monitoring costs of about one quarter of firms’ gross return on capital, with estimates ranging from 0.15 to 0.35 across specifications. Our results provide direct firm-level support for the financial accelerator mechanism and imply monitoring costs of the same order of magnitude as the benchmark calibration of Bernanke et al.