Financing Constraints and the Amplification of Aggregate Downturns
Daniel R. Carvalho
USC Marshall School of Business
October 1, 2012
This paper studies the effects of industry peers’ financial conditions on firms during industry downturns. I develop an approach to isolate sharp differences in the timing of firms’ long-term debt maturity across close but different years. The analysis provides direct evidence that common industry fundamentals are not important for explaining these differences and uses them to predict arguably exogenous variation in peers’ financial conditions at the time of downturns. I find that firms experience significantly greater valuation losses during industry downturns when their peers have their long-term debt largely maturing at the exact time of downturns. These effects are only important in industries with industry-specific assets, for firms with significant amounts of their own debt maturing soon and are offset in concentrated industries. I find no effects of peers’ financial positions outside common industry downturns and implement several robustness checks. Overall, the results suggest that externalities imposed by financially constrained firms on industry peers can significantly amplify the effects of industry downturns in an important set of industries.
Number of Pages in PDF File: 58
Keywords: financing constraints, externalities, amplification
JEL Classification: G32, G31, G30working papers series
Date posted: November 30, 2011 ; Last revised: October 3, 2012
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