Survive Another Day: Using Changes in the Composition of Investments to Measure the Cost of Credit Constraints
AbstractWe introduce a novel empirical strategy to measure credit shocks. Theoretically, we show that credit shocks reduce the value of long term investments relative to short term ones. Under the (conservative) assumption that demand shocks affect short and long run investments similarly, credit shocks can be measured within firms by the shift in the investment vector away from long run investments and towards short term ones. This within-firm strategy makes it possible to use firm-times-year fixed effects to capture unobserved between firm heterogeneity as well as idiosyncratic demand shocks. We implement this strategy using a rich panel data set of Spanish manufacturing firms before and after the credit crisis in 2008. This allows us to quantify the effect of the credit crunch: our theory suggests that credit constraints are equivalent to an additional tax rate of around 11% on the longest lived capital. To pin down credit constraints as the cause for this investment pattern we use two triple differences strategies where we show (i) that only Spanish owned firms became credit constrained during the financial crisis, and that the drop in long term investments after the crisis is indeed driven by credit constrained Spanish firms; and that (ii) the impact on long term investment is mostly noticeable in firms that started the crisis with more mature debt to roll over.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1188.
Date of creation: Feb 2013
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
Financial crisis; credit constraints; innovation; investment choices;
Find related papers by JEL classification:
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
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