Survive Another Day: Using Changes in the Composition of Investments to Measure the Cost of Credit Constraints
We introduce a novel empirical strategy to measure credit shocks. Theoretically, we show that credit shocks reduce the value of long term investments relative to short term ones. Under the (conservative) assumption that demand shocks affect short and long run investments similarly, credit shocks can be measured within firms by the shift in the investment vector away from long run investments and towards short term ones. This within-firm strategy makes it possible to use firm-times-year fixed effects to capture unobserved between firm heterogeneity as well as idiosyncratic demand shocks. We implement this strategy using a rich panel data set of Spanish manufacturing firms before and after the credit crisis in 2008. This allows us to quantify the effect of the credit crunch: our theory suggests that credit constraints are equivalent to an additional tax rate of around 11% on the longest lived capital. To pin down credit constraints as the cause for this investment pattern we use two triple differences strategies where we show (i) that only Spanish owned firms became credit constrained during the financial crisis, and that the drop in long term investments after the crisis is indeed driven by credit constrained Spanish firms; and that (ii) the impact on long term investment is mostly noticeable in firms that started the crisis with more mature debt to roll over.
|Date of creation:||Feb 2013|
|Date of revision:|
|Contact details of provider:|| Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP|
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.:
- Paravisini, Daniel & Rappoport, Veronica & Schnabl, Philipp & Wolfenzon, Daniel, 2010.
"Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data,"
2010-022, Banco Central de Reserva del Perú.
- Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2011. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," NBER Working Papers 16975, National Bureau of Economic Research, Inc.
- Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
- Toni M. Whited, 1990.
"Debt, liquidity constraints, and corporate investment: evidence from panel data,"
Finance and Economics Discussion Series
114, Board of Governors of the Federal Reserve System (U.S.).
- Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
- Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
- Owen Lamont, 1996.
"Cash Flow and Investment: Evidence from Internal Capital Markets,"
NBER Working Papers
5499, National Bureau of Economic Research, Inc.
- Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
- Assaf Eisdorfer, 2008. "Empirical Evidence of Risk Shifting in Financially Distressed Firms," Journal of Finance, American Finance Association, vol. 63(2), pages 609-637, 04.
- Nobuhiro Kiyotaki & Gauti Eggertsson & Andrea Ferrero & Marco Del Negro, 2010. "The Great Escape? A Quantitative Evaluation of the Fed’s Non-Standard Policies," 2010 Meeting Papers 113, Society for Economic Dynamics.
When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp1188. 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 references are entirely missing, you can add them using this form.