The Real Effects of Financial Constraints: Evidence from a Financial Crisis
51 Pages Posted: 11 Mar 2009
Date Written: March 11, 2009
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: Suggested Citation