Strategic Management during the Financial Crisis: How Firms Adjust their Strategic Investments in Response to Credit Market Disruptions

Abstract

This study investigates how companies adjusted their investments in key strategic resources -- i.e., their workforce, capital expenditures, R&D, and CSR -- in response to the sharp increase in the cost of credit (the "credit crunch") during the financial crisis of 2007-2009. We compare companies whose long-term debt matured shortly before versus after the credit crunch to obtain (quasi-)random variation in the extent to which companies were hit by the higher borrowing costs. We find that companies that were adversely affected followed a "two-pronged" approach of curtailing their workforce and capital expenditures, while maintaining their investments in R&D and CSR. We further document that firms that followed this two-pronged approach performed better post-crisis.

Keywords: financial crisis; competitive strategy; corporate social responsibility; innovation; employment; physical capital; financial performance

JEL Classification: M1, M2, M10, M14, E32, O31, O32