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The firm-level credit multiplier

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  • Campello, Murillo
  • Hackbarth, Dirk

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.

Suggested Citation

  • Campello, Murillo & Hackbarth, Dirk, 2012. "The firm-level credit multiplier," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 446-472.
  • Handle: RePEc:eee:jfinin:v:21:y:2012:i:3:p:446-472
    DOI: 10.1016/j.jfi.2012.02.001
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:corfin:v:45:y:2017:i:c:p:522-539 is not listed on IDEAS
    2. Arping, Stefan & Sautner, Zacharias, 2010. "Corporate governance and leverage: Evidence from a natural experiment," Finance Research Letters, Elsevier, vol. 7(2), pages 127-134, June.
    3. Rapp, Marc Steffen & Schmid, Thomas & Urban, Daniel, 2014. "The value of financial flexibility and corporate financial policy," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 288-302.
    4. repec:eee:riibaf:v:42:y:2017:i:c:p:874-886 is not listed on IDEAS
    5. Bing Xu, 2017. "Permissible collateral and access to finance: evidence from a quasi-natural experiment," Working Papers 1750, Banco de España;Working Papers Homepage.
    6. Bustamante, M. Cecilia, 2016. "How Do Frictions Affect Corporate Investment? A Structural Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(06), pages 1863-1895, December.
    7. Norden, Lars & van Kampen, Stefan, 2013. "Corporate leverage and the collateral channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5062-5072.
    8. Golbeck, Steven & Linetsky, Vadim, 2013. "Asset financing with credit risk," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 43-59.

    More about this item

    Keywords

    Credit multiplier; Capital structure; Financing constraints; Investment; Real options;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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