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Financial Policies and the Financial Crisis: How Important Was the Systemic Credit Contraction for Industrial Corporations?

Author

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  • Kahle, Kathleen M.

    (University of Arizona)

  • Stulz, Rene M.

    (Ohio State University)

Abstract

Although firm financial policies were affected by a credit contraction during the recent financial crisis, the impact of increased uncertainty and decreased growth opportunities was stronger than that of the credit contraction per se. From the start of the financial crisis (third quarter of 2007) to its peak (first quarter of 2009), both large and investment-grade non-financial firms show no evidence of suffering from an exceptional systemic credit contraction. Instead of decreasing their cash holdings as would be expected with a temporarily impaired credit supply, these firms increase their cash holdings sharply (by 17.8% in the case of investment-grade firms) after the fall of Lehman. Though small and unrated firms have exceptionally low net debt issuance at the peak of the crisis, their net debt issuance in the first year of the crisis is no different from the last year of the credit boom. In contrast, however, the net equity issuance of small and unrated firms is low throughout 2008, whereas an impaired credit supply by itself would have encouraged firms to increase their equity issuance. On average, the cumulative financing impact of the decrease in net equity issuance from the start to the peak of the crisis is approximately twice the cumulative impact of the decrease in net debt issuance. The decrease in net equity issuance and the increase in cash holdings are also economically important for firms with no debt.

Suggested Citation

  • Kahle, Kathleen M. & Stulz, Rene M., 2010. "Financial Policies and the Financial Crisis: How Important Was the Systemic Credit Contraction for Industrial Corporations?," Working Paper Series 2010-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2010-13
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    2. Christian Koziol & Philipp Koziol & Thomas Schön, 2015. "Do correlated defaults matter for CDS premia? An empirical analysis," Review of Derivatives Research, Springer, vol. 18(3), pages 191-224, October.
    3. Kremp, Elizabeth & Sevestre, Patrick, 2013. "Did the crisis induce credit rationing for French SMEs?," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3757-3772.
    4. Xing, Jing, 2018. "Territorial tax system reform and multinationals' foreign cash holdings: New evidence from Japan," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 252-282.
    5. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 29-48, Winter.
    6. Gregor Matvos & Amit Seru, 2014. "Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1143-1189.
    7. Erwan Quintin & Dean Corbae, 2016. "Asset Quality Dynamics," 2016 Meeting Papers 418, Society for Economic Dynamics.
    8. Carlos Iván Cañón Salazar, 2016. "Distributional Policy Effects with Many Treatment Outcomes," Working Papers 2016-01, Banco de México.
    9. Beraza Garmendia, Ana & San José Ruiz de Aguirre, Leire & Retolaza Ávalos, José Luis, 2017. "Lankidetza ekonomia diruzaintza kudeaketan aplikatzea posible al da?," Revista de Dirección y Administración de Empresas, Universidad del País Vasco - Escuela Universitaria de Estudios Empresariales de San Sebastián.
    10. Akbar, Saeed & Rehman, Shafiq ur & Ormrod, Phillip, 2013. "The impact of recent financial shocks on the financing and investment policies of UK private firms," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 59-70.
    11. Garcia-Appendini, Emilia & Montoriol-Garriga, Judit, 2013. "Firms as liquidity providers: Evidence from the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 109(1), pages 272-291.
    12. Jinjarak, Yothin, 2013. "Supply Chains and Credit-Market Shocks: Some Implications for Emerging Markets," ADBI Working Papers 443, Asian Development Bank Institute.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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