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Financial Policies, Investment, and the Financial Crisis: Impaired Credit Channel or Diminished Demand for Capital?

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  • Kahle, Kathleen M.

    (University of AZ)

  • Stulz, Rene M.

    (OH State University)

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    Abstract

    Though much of the narrative of the financial crisis has focused on the impact of a bank credit supply shock, we show that such a shock cannot explain important features of the financial and investment policies of industrial firms. These features are consistent with a dominant role for the increase in risk and the reduction in demand for goods that occurred during the crisis. The net equity issuance of small firms and unrated firms is abnormally low throughout the crisis, whereas an impaired credit supply by itself would have encouraged these firms to increase their net equity issuance. After September 2008, firms increase their cash holdings rather than use them to mitigate the impact of the credit supply shock. Firms that are more bank-dependent before the crisis do not reduce their capital expenditures more than other firms during the crisis. Finally, the evidence is strongly supportive of theories that emphasize the importance of collateral and corporate net worth in financing and investment policies, as firms with stronger balance sheets reduce capital expenditures less after September 2008.

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    File URL: http://fisher.osu.edu/supplements/10/10471/2011-3.pdf
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    Bibliographic Info

    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2011-3.

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    Date of creation: Feb 2011
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    Handle: RePEc:ecl:ohidic:2011-3

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    1. Malcolm Baker, 2009. "Capital Market-Driven Corporate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 181-205, November.
    2. Erel, Isil & Julio, Brandon & Kim, Woojin & Weisbach, Michael S., 2011. "Macroeconomic Conditions and Capital Raising," Working Paper Series 2011-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Heitor Almeida & Murillo Campello & Bruno Laranjeira & Scott Weisbenner, 2009. "Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis," NBER Working Papers 14990, National Bureau of Economic Research, Inc.
    4. Bo Becker & Victoria Ivashina, 2011. "Cyclicality of Credit Supply: Firm Level Evidence," NBER Working Papers 17392, National Bureau of Economic Research, Inc.
    5. Pietro Veronesi & Lubos Pastor, 2011. "Uncertainty about Government Policy and Stock Prices," 2011 Meeting Papers 86, Society for Economic Dynamics.
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    8. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    9. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    10. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088, March.
    11. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
    12. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    13. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
    14. Lemmon, Michael & Roberts, Michael R., 2010. "The Response of Corporate Financing and Investment to Changes in the Supply of Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(03), pages 555-587, June.
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    Cited by:
    1. Perera, Anil & Ralston, Deborah & Wickramanayake, J., 2014. "Impact of off-balance sheet banking on the bank lending channel of monetary transmission: Evidence from South Asia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 195-216.

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