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The Firm-Level Credit Multiplier

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  • Murillo Campello
  • Dirk Hackbarth

Abstract

We study the effect of asset tangibility on corporate financing and investment decisions. Financially constrained firms benefit the most from investing in tangible assets because those assets help relax constraints, allowing for further investment. Using a dynamic model, we characterize this effect – which we call firm-level credit multiplier – and show how asset tangibility increases the sensitivity of investment to Tobin’s Q for financially constrained firms. Examining a large sample of manufacturers over the 1971-2005 period as well as simulated data, we find support for our theory’s tangibility–investment channel. We further verify that our findings are driven by firms’ debt issuance activities. Consistent with our empirical identification strategy, the firm-level credit multiplier is absent from samples of financially unconstrained firms and samples of financially constrained firms with low spare debt capacity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17805.

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Date of creation: Feb 2012
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Publication status: published as Campello, Murillo & Hackbarth, Dirk, 2012. "The firm-level credit multiplier," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 446-472.
Handle: RePEc:nbr:nberwo:17805

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Cited by:
  1. Stefan Arping & Zacharias Sautner, 2010. "Corporate Governance and Leverage: Evidence from a Natural Experiment," Tinbergen Institute Discussion Papers 10-019/2, Tinbergen Institute.
  2. Norden, Lars & van Kampen, Stefan, 2013. "Corporate leverage and the collateral channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5062-5072.
  3. Golbeck, Steven & Linetsky, Vadim, 2013. "Asset financing with credit risk," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 43-59.

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