The Real Effects of Financial Constraints: Evidence from a Financial Crisis

51 Pages Posted: 11 Mar 2009

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Multiple version iconThere are 3 versions of this paper

Date Written: March 11, 2009

Abstract

The global credit crisis of 2008 provides a unique opportunity to study the effects of financing constraints on corporate behavior. Based on standard economic priors, we investigate whether this credit supply shock has a differential impact on the real and financial policies of credit constrained firms. In contrast to previous research, which has used proxies such as firm size and credit ratings to measure constraints, we survey 1,050 CFOs in the U.S., Europe, and Asia and directly assess whether their firms are credit constrained. Our evidence shows that the impact of the financial crisis is severe on credit constrained firms, leading to deeper cuts in planned R&D, employment, and capital spending. These firms also burn through more cash, draw more heavily on lines of credit for fear banks will restrict access in the future, and sell more assets to fund their operations. Using our direct measure of constraints, we also find that the inability to borrow externally causes many firms to bypass attractive investment projects, with 86% of constrained U.S. CFOs saying their investment in attractive projects has been restricted during the credit crisis of 2008 and more than half outright cancelling or postponing their investment plans. Our results also hold in Europe and Asia, and in many cases are stronger in those economies.

Keywords: Financial crisis, financing constraints, investment spending, liquidity management, matching estimators

JEL Classification: G31

Suggested Citation

Campello, Murillo and Graham, John Robert and Harvey, Campbell R., The Real Effects of Financial Constraints: Evidence from a Financial Crisis (March 11, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1357805 or http://dx.doi.org/10.2139/ssrn.1357805

Murillo Campello (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

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John Robert Graham

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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