The Long-Term Cost of the Financial Crisis
Cornell University; National Bureau of Economic Research (NBER)
John R. Graham
Duke University; NBER
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
March 11, 2009
The focus of the current credit crisis is on the immediate implications, such as reduced profits and increased unemployment. In contrast, we show that there are worrisome long-term economic consequences of the crisis through its effect on financially constrained firms. Using a survey of over 1,000 CFOs in the United States, Europe and Asia, we show that firms are cutting back or canceling projects that they know add to firm value. The elimination of profitable projects is especially acute for firms that face financial constraints. One of the basic tenets of finance is that projects that enhance firm value should be pursued. Financial constraints potentially prevent the funding of these projects. The current credit crisis is an ideal setting to measure the impact of constraints on value creation. Turning down or canceling profitable projects is a lesser known cost of the current financial crisis. Our evidence suggests that in the scramble for short-term cash flow, firms are sacrificing long-term value. This implies lower future growth opportunities and lower future employment growth.
Number of Pages in PDF File: 6
Keywords: Financial crisis, financing constraints, investment spending, liquidity management, matching estimators
JEL Classification: G31working papers series
Date posted: March 12, 2009
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