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

  • Jakob B Madsen
  • Sarah J Carrington

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.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2011/1811cyclesinvestmentmadsencarrington.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 18-11.

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Length: 23 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:mos:moswps:2011-18
Contact details of provider: Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
Fax: +61-3-9905-5476
Web page: http://www.buseco.monash.edu.au/eco/
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  1. 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, 07.
  2. Blanchard, Olivier J, 1983. "Dynamic Effects of a Shift in Savings; The Role of Firms," Econometrica, Econometric Society, vol. 51(5), pages 1583-91, September.
  3. Joseph E. Stiglitz, 1989. "Money, Credit, and Business Fluctuations," NBER Working Papers 2823, National Bureau of Economic Research, Inc.
  4. Bacchetta, Philippe & Caminal, Ramon, 1996. "Do Capital Market Imperfections Exacerbate Output Fluctuations?," CEPR Discussion Papers 1422, C.E.P.R. Discussion Papers.
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