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Credit Crunched? Consequences on Corporate Financial Policy, Investment, and Risk

Author

Listed:
  • Huidan Lin

    (Columbia University)

  • Daniel Paravisini

    (Columbia University GSB)

Abstract

Consistent with a precautionary savings model, we demonstrate empirically that firms use equity financing to build up liquid asset reserves in response to an exogenous decline in the supply of credit. For identification, we compare public U.S. firms in the same industry, location, and size quintile, but whose main lenders’ credit supplies are differentially affected by the WorldCom demise in 2002. The results indicate that an increase in external financing costs induces a short run decline in investment, a medium run decline (increase) in cash flow level (volatility), and an increase in risk premia.

Suggested Citation

  • Huidan Lin & Daniel Paravisini, 2009. "Credit Crunched? Consequences on Corporate Financial Policy, Investment, and Risk," 2009 Meeting Papers 1197, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:1197
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