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Cycles and Corporate Investment: Direct Tests Using Survey Data on Banks’ Lending Practices

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  • Jakob B Madsen
  • Sarah J Carrington

Abstract

Microeconomic studies have found cash flow to be important for the investment decision and this result is often interpreted as is evidence of adverse selection in credit markets. Using direct survey evidence on banks’ willingness to lend, this research examines the role of credit in the investment decision while allowing for cash-flow, Tobin’s q, income, uncertainty and default risks. Regression analysis reveals that banks’ willingness to lend, income and uncertainty are the key drivers of cyclical fluctuations in corporate investment. These results have important implications for the conduct of monetary policy as well as research on business cycles.

Suggested Citation

  • Jakob B Madsen & Sarah J Carrington, 2011. "Cycles and Corporate Investment: Direct Tests Using Survey Data on Banks’ Lending Practices," Monash Economics Working Papers 18-11, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2011-18
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2011/1811cyclesinvestmentmadsencarrington.pdf
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    References listed on IDEAS

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    1. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 597-624.
    2. Jakob B Madsen & E Philip Davis, 2006. "Equity Prices, Productivity Growth and 'The New Economy'," Economic Journal, Royal Economic Society, vol. 116(513), pages 791-811, July.
    3. Blanchard, Olivier J, 1983. "Dynamic Effects of a Shift in Savings; The Role of Firms," Econometrica, Econometric Society, vol. 51(5), pages 1583-1591, September.
    4. Bacchetta, Philippe & Caminal, Ramon, 2000. "Do capital market imperfections exacerbate output fluctuations?," European Economic Review, Elsevier, vol. 44(3), pages 449-468, March.
    5. Stiglitz, Joseph E, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 307-322, December.
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    Cited by:

    1. Madsen, Jakob B. & Carrington, Sarah J., 2012. "Credit cycles and corporate investment: Direct tests using survey data on banks’ lending practices," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 429-440.

    More about this item

    Keywords

    credit constraints; corporate investment; Tobin’s q;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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