Financial frictions and corporate investment in bad times. Who cut back most?

We explore the differential impact of leverage and debt maturity structure on investment in European firms belonging to different countries and industries during the financial and sovereign crisis period. We find that in crisis years (i) leverage exerts a strong and negative effect on the level of investment and (ii) firms with more long-term debt invest less. We also uncover heterogeneous reactions to the crisis due to the level of debt and its maturity by sorting firms by country-specific and firm-specific characteristics. We find that firms who cut back most investment in crisis years (conditional on the level of leverage and maturity) (i) are located in Eurozone periphery countries, and (ii) are featured by a small-scale. Factors that help firms alleviate financial frictions and shield investment are being able to rely on multiple bank relationships and the ability to generate internal resources (cash flows). We find no evidence of a positive nexus between cash and investment, and only little evidence of a positive effect on investment of access to capital markets, to mitigate the negative impact of debt in crisis years.