Capital Market Access and Cash Flow Allocation During the Financial Crisis

Abstract

Being a publicly listed firm is associated with costs and benefits related to investment, financing, and payout policies. To understand how a stock market listing influences the joint decisions on these corporate policies we analyze how European public and matched private firms adjust their cash flow allocation in response to the exogenous bank lending supply shock during the 2007-2009 financial crisis. Our novel empirical design allows us to analyze inter-dependent cash flow allocation adjustments within the cash flow identity.

We find that both public and matched private firms heavily reduce their investments, financing, and payouts during the financial crisis. While investment adjustments are identical, public firms net issue more long-term debt to maintain relatively more payouts and repurchase stock.Our results suggest that while a stock market listing relaxes financial constraints, a listing induces managers to cater to shareholders by smoothing payouts and shoring up stock through repurchases.

We find that the pressure on public firms to be more stock-market focused is greater in market-based economies. By contrast, in bank-dependent economies, public firms behave more sensibly: they invest relatively more and engage less in smoothing payouts and repurchasing stock.

Keywords: Investment policies, financing policies, private firms, cash flow allocation, capital market access, financial crisis

JEL Classification: D22, D92, G31, G32, G34