Advanced Search
MyIDEAS: Login to save this paper or follow this series

Leverage as a State Variable for Employment, Inventory Accumulation, andFixed Investment

Contents:

Author Info

  • Charles W. Calomiris
  • Athanasios Orphanides
  • Steven A. Sharpe

Abstract

The importance of a firm's balance sheet for determining its investment and employment decisions is the central assumption of macroeconomic models of 'debt deflation' or 'debt overhang.' According to these models, firm investment decisions are influenced not only by the fundamental opportunity set of the firm, but also by the firm's existing financial condition, especially its leverage. This paper tests that assumption by examining whether the responsiveness of employment, investment, and inventory accumulation to exogenous changes in sales depend on the leverage of the firm. We find that leverage acts as an important state variable for conditioning the response of all three variables to changes in sales. We also find that this effect varies depending on the state of the economy. During recessions, higher leverage magnifies the contractionary effect of declines in sales on investment; during times of positive sales growth, higher leverage tends to dampen the expansionary effect of growth in demand. The size and significance of leverage conditioning effects are larger during recessions. These results support theoretical models of the potential importance of 'debt overhang' effects. Firms that use debt to finance expansion during times of increasing demand suffer reduced ability to maintain growth during recessions as a consequence of their higher leverage.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w4800.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4800.

as in new window
Length:
Date of creation: Jul 1994
Date of revision:
Publication status: published as Capie, Forrest and Geoffrey Wood (eds.) Asset Prices and the Real Economy. Macmillan, 1997.
Handle: RePEc:nbr:nberwo:4800

Note: CF
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Ben Bemanke & Harold James, 1991. "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison," NBER Chapters, in: Financial Markets and Financial Crises, pages 33-68 National Bureau of Economic Research, Inc.
  2. Charles W. Calomiris & Charles P. Himmelberg & Paul Wachtel, 1994. "Commercial Paper, Corporate Finance, and the Business Cycle: A Microeconomic Perspective," NBER Working Papers 4848, National Bureau of Economic Research, Inc.
  3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 187-221, June.
  4. Eichengreen, Barry & Sachs, Jeffrey, 1986. "Competitive devaluation and the Great Depression : A theoretical reassessment," Economics Letters, Elsevier, Elsevier, vol. 22(1), pages 67-71.
  5. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
  6. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(2), pages 265-293, October.
  7. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  8. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 93-4, Board of Governors of the Federal Reserve System (U.S.).
  9. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262700441, December.
  10. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  11. Calomiris, Charles W & Hubbard, R Glenn, 1990. "Firm Heterogeneity, Internal Finance, and 'Credit Rationing.'," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 100(399), pages 90-104, March.
  12. Charles W. Calomiris, 1993. "Financial Factors in the Great Depression," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(2), pages 61-85, Spring.
  13. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
  14. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 213-24, January.
  15. Paul Asquith & Robert Gertner & David Scharfstein, 1991. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," NBER Working Papers 3942, National Bureau of Economic Research, Inc.
  16. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics, EconWPA 9401001, EconWPA.
  17. Charles W. Calomiris & R. Glenn Hubbard & James H. Stock, 1986. "The Farm Debt Crisis and Public Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 441-486.
  18. Bronwyn H. Hall & Clint Cumminq & Elizabeth S. Laderman & Joy Mundy, 1988. "The R&D Master File Documentation," NBER Technical Working Papers 0072, National Bureau of Economic Research, Inc.
  19. R. Glenn Hubbard & Anil Kashyap, 1990. "Internal net worth and the investment process: an application to U.S. agriculture," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 124, Board of Governors of the Federal Reserve System (U.S.).
  20. Charles W. Calomiris, 1994. "Is the discount window necessary? a Penn Central perspective," Review, Federal Reserve Bank of St. Louis, issue May, pages 31-55.
  21. Richard W. Kopcke & with Mark M. Howrey, 1994. "A panel study of investment: sales, cash flow, the cost of capital, and leverage," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jan, pages 9-30.
  22. Richard Cantor, 1990. "Effects of leverage on corporate investment and hiring decisions," Quarterly Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sum, pages 31-41.
  23. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  24. Mark Gertler & R. Glenn Hubbard, 1990. "Taxation, Corporate Capital Structure, and Financial Distress," NBER Chapters, in: Tax Policy and the Economy: Volume 4, pages 43-72 National Bureau of Economic Research, Inc.
  25. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Spr, pages 50-70.
  26. Sharpe, Steven A, 1994. "Financial Market Imperfections, Firm Leverage, and the Cyclicality of Employment," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 1060-74, September.
  27. Joe Peek & Eric S. Rosengren, 1992. "The capital crunch in New England," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue May, pages 21-31.
  28. George L. Perry & Charles L. Schultze, 1993. "Was This Recession Different? Are They All Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 145-212.
  29. Calomiris, Charles W & Hubbard, R Glenn, 1989. "Price Flexibility, Credit Availability, and Economic Fluctuations: Evidence from the United States, 1894-1909," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(3), pages 429-52, August.
  30. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  31. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 38(04), pages 918-937, December.
  32. Mishkin, Frederic S, 1976. "Illiquidity, Consumer Durable Expenditure, and Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 66(4), pages 642-54, September.
  33. Ben S. Bernanke & John Y. Campbell, 1988. "Is There a Corporate Debt Crisis?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 83-140.
  34. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  35. Hunter, Helen Manning, 1982. "The Role of Business Liquidity During the Great Depression and Afterwards: Differences Between Large and Small Firms," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 42(04), pages 883-902, December.
  36. Richard F. Syron, 1991. "Are we experiencing a credit crunch?," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jul, pages 3-10.
  37. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Spaliara, Marina-Eliza, 2009. "Do financial factors affect the capital-labour ratio? Evidence from UK firm-level data," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(10), pages 1932-1947, October.
  2. Heisz, Andrew & Larochelle-Cote, Sebastien, 2004. "Corporate Financial Leverage in Canadian Manufacturing: Consequences for Employment and Inventories," Analytical Studies Branch Research Paper Series 2004217e, Statistics Canada, Analytical Studies Branch.
  3. Kazuo Ogawa, 2004. "Debt, R&D Investment and Technological Progress: A Panel Study of Japanese Manufacturing Firms in the 90s," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0607, Institute of Social and Economic Research, Osaka University.
  4. Kazuo Ogawa, 2003. "Financial Distress and Corporate Investment: The Japanese Case in the 90s," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0584, Institute of Social and Economic Research, Osaka University.
  5. Calomiris, Charles W. & Love, Inessa & Martínez Pería, María Soledad, 2012. "Stock returns’ sensitivities to crisis shocks: Evidence from developed and emerging markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(4), pages 743-765.
  6. Tobias Miarka & Michael Troge, 2005. "Do bank-firm relationships reduce bank debt? Evidence from Japan," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(1), pages 75-92.
  7. Simon Gilchrist & Charles Himmelberg, 1999. "Investment: Fundamentals and Finance," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274 National Bureau of Economic Research, Inc.
  8. Wohlers, Eckhardt & Größl, Ingrid & Stahlecker, Peter, 1999. "Finanzierungsstruktur und Risiken im Unternehmenssektor der Bundesrepublik Deutschland : eine empirische Bestandsaufnahme," HWWA Discussion Papers 83, Hamburg Institute of International Economics (HWWA).
  9. Zyblock, Miles, 1997. "Corporate Financial Leverage: A Canada - U.S. Comparison, 1961-1996," Analytical Studies Branch Research Paper Series 1997111e, Statistics Canada, Analytical Studies Branch.
  10. Vermeulen, Philip, 2000. "Business fixed investment: evidence of a financial accelerator in Europe," Working Paper Series, European Central Bank 0037, European Central Bank.
  11. Efraim Benmelech & Nittai K. Bergman & Amit Seru, 2011. "Financing Labor," NBER Working Papers 17144, National Bureau of Economic Research, Inc.
  12. Anna Bottasso, 1996. "Firms’ Financial Structure And Real Decisions: A Critical Survey Of The Empirical Literature," CERIS Working Paper, Institute for Economic Research on Firms and Growth - Moncalieri (TO) 199623, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
  13. Egon Zakrajsek, 1997. "Retail inventories, internal finance, and aggregate fluctuations," Research Paper, Federal Reserve Bank of New York 9722, Federal Reserve Bank of New York.
  14. Kazuo Ogawa, 2003. "Financial Distress and Employment: The Japanese Case in the 90s," NBER Working Papers 9646, National Bureau of Economic Research, Inc.
  15. Charles W. Calomiris & Inessa Love & Maria Soledad Martinez Peria, 2010. "Crisis “Shock Factors” and the Cross-Section of Global Equity Returns," NBER Working Papers 16559, National Bureau of Economic Research, Inc.
  16. Zyblock, Miles, 1997. "L'effet de levier financier des entreprises : une comparaison entre le Canada et les E.-U., 1961-1996," Direction des etudes analytiques : documents de recherche 1997111f, Statistics Canada, Direction des etudes analytiques.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4800. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.