Financial Frictions and Corporate Investment in Bad Times. Who Cut Back Most?

35 Pages Posted: 2 May 2017

See all articles by Brunella Bruno

Brunella Bruno

Bocconi University - Department of Finance

Alexandra D'Onofrio

LUISS Guido Carli University - Arcelli Centre for Monetary and Financial Studies

Immacolata Marino

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance; University of Naples Federico II

Date Written: April 2017

Abstract

We explore the differential impact of leverage and debt maturity structure on investment in European firms belonging to different countries and industries during the financial and sovereign crisis period. We find that in crisis years (i) leverage exerts a strong and negative effect on the level of investment and (ii) firms with more long-term debt invest less. We also uncover heterogeneous reactions to the crisis due to the level of debt and its maturity by sorting firms by country-specific and firm-specific characteristics. We find that firms who cut back most investment in crisis years (conditional on the level of leverage and maturity) (i) are located in Eurozone periphery countries, and (ii) are featured by a small-scale. Factors that help firms alleviate financial frictions and shield investment are being able to rely on multiple bank relationships and the ability to generate internal resources (cash flows). We find no evidence of a positive nexus between cash and investment, and only little evidence of a positive effect on investment of access to capital markets, to mitigate the negative impact of debt in crisis years.

Keywords: crisis, investment, leverage, long-term debt

Suggested Citation

Bruno, Brunella and D'Onofrio, Alexandra and Marino, Immacolata, Financial Frictions and Corporate Investment in Bad Times. Who Cut Back Most? (April 2017). CEPR Discussion Paper No. DP12003. Available at SSRN: https://ssrn.com/abstract=2961766

Brunella Bruno (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Alexandra D'Onofrio

LUISS Guido Carli University - Arcelli Centre for Monetary and Financial Studies ( email )

Viale Romania 32
Rome, 00197
Italy

Immacolata Marino

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

University of Naples Federico II ( email )

via Cinthia, 4
Naples, Caserta 80126
Italy

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