This article investigates the effect of banks' lending capacity on firms' investment. To identify exogenous shocks to loan supply, we utilize the natural experiment provided by Japan's Great Hanshin-Awaji earthquake in 1995. Using a unique data set that allows us to identify firms and banks in the earthquake-affected areas, we find that the investment ratio of firms located outside the earthquake-affected areas but having a main bank inside the areas was significantly smaller than that of firms located outside the areas and having a main bank outside the areas. Our findings suggest that loan supply shocks affect firm investment. [ABSTRACT FROM AUTHOR]
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