The Firm-Level Credit Multiplier
Cornell University; National Bureau of Economic Research (NBER)
University of Illinois at Urbana-Champaign - College of Business
NBER Working Paper No. w17805
We study the effect of asset tangibility on corporate financing and investment decisions. Financially constrained firms benefit the most from investing in tangible assets because those assets help relax constraints, allowing for further investment. Using a dynamic model, we characterize this effect – which we call firm-level credit multiplier – and show how asset tangibility increases the sensitivity of investment to Tobin’s Q for financially constrained firms. Examining a large sample of manufacturers over the 1971-2005 period as well as simulated data, we find support for our theory’s tangibility–investment channel. We further verify that our findings are driven by firms’ debt issuance activities. Consistent with our empirical identification strategy, the firm-level credit multiplier is absent from samples of financially unconstrained firms and samples of financially constrained firms with low spare debt capacity.
Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Number of Pages in PDF File: 51working papers series
Date posted: February 3, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.781 seconds