Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis
University of Washington - Michael G. Foster School of Business
University of Southern California - Marshall School of Business - Finance and Business Economics Department
Berk A. Sensoy
Ohio State University - Fisher College of Business
August 28, 2009
Journal of Financial Economics (JFE), Forthcoming
Marshall School of Business Working Paper No. MKT 01-09
Ross School of Business Paper No. 1121
We study the effect of the recent financial crisis on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. Corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address endogeneity concerns, we measure firms’ financial positions as much as four years prior to the crisis, and confirm that similar results do not follow placebo crises in the summers of 2003–2006. Nor do similar results follow the negative demand shock caused by September 11, 2001. The effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature.
Number of Pages in PDF File: 47
Keywords: Corporate Investment, Cash, Corporate Liquidity, Financing Constraints, Crisis
JEL Classification: G01, G31, G32
Date posted: October 18, 2008 ; Last revised: December 6, 2009
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