Abstract

http://ssrn.com/abstract=1475663
 
 

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The Business Cycle, Investor Sentiment, and Costly External Finance


R. David McLean


University of Alberta - Department of Finance and Statistical Analysis

Mengxin Zhao


University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis; University of Alberta

June 20, 2012

Journal of Finance, Forthcoming
University of Alberta School of Business Research Paper No. 2013-1310

Abstract:     
The recent financial crisis highlights the importance of understanding how financial market conditions impact the real economy. We ask whether access to external finance typically varies over time, and if so what the effects are on investment and employment. Consistent with time-varying external finance costs, we find that both investment and employment are less sensitive to Tobin’s q and more sensitive to cash flow during recessions and periods of low investor sentiment. Share issuance and debt issuance both play roles in causing these effects, although our findings suggest that share issuance plays a bigger role. Alternative tests, which do not rely on q and cash flow sensitivities, support the idea that both low sentiment and recessions increase external finance costs, which in turn limit investment and employment.

Number of Pages in PDF File: 53

Keywords: Business Cycle, Recession, Investor Sentiment, Financial Constraint, Market Efficiency, Corporate Investment

JEL Classification: E32, E44, G10

Accepted Paper Series


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Date posted: September 20, 2009 ; Last revised: August 7, 2013

Suggested Citation

McLean, R. David and Zhao, Mengxin, The Business Cycle, Investor Sentiment, and Costly External Finance (June 20, 2012). Journal of Finance, Forthcoming; University of Alberta School of Business Research Paper No. 2013-1310. Available at SSRN: http://ssrn.com/abstract=1475663 or http://dx.doi.org/10.2139/ssrn.1475663

Contact Information

R. David McLean (Contact Author)
University of Alberta - Department of Finance and Statistical Analysis ( email )
School of Business
Edmonton, Alberta T6G 2R6
Canada
780-492-8005 (Phone)
780-492-3325 (Fax)
HOME PAGE: http://business.ualberta.ca/rdmclean
Mengxin Zhao
University of Alberta - School of Business ( email )
2-43 Business Building
Edmonton, Alberta T6G 2C7
Canada
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

University of Alberta ( email )
Rm 238, School of Business
University of Alberta
Edmonton, Alberta T6G2C6
Canada
7802481318 (Phone)
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