Understanding the Credit Multiplier: The Working Capital Channel

60 Pages Posted: 16 Nov 2017 Last revised: 21 Oct 2018

See all articles by Heitor Almeida

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Daniel R. Carvalho

Indiana University - Kelley School of Business

Taehyun Kim

University of Notre Dame - Department of Finance

Date Written: October 3, 2018

Abstract

We provide novel evidence that frictions in the financing of working capital can limit firms’ production capacity, leading to the amplification and propagation of liquidity problems over time. We propose a new approach to identify this firm credit multiplier that compares how a same firm responds to permanent shocks differently when these shocks are initiated in the period in which they are predicted to be most profitable (their “main quarter”). Our analysis implements this test with oil price shocks and provides extensive evidence supporting our identification strategy. Our results suggest that the financing of working capital can be an important channel for understanding the real effects and determinants of short-term funding problems faced by firms.

Keywords: Credit Multiplier, Working Capital, Financing Frictions

JEL Classification: G31, G32, G38, E32

Suggested Citation

Almeida, Heitor and Carvalho, Daniel R. and Kim, Taehyun, Understanding the Credit Multiplier: The Working Capital Channel (October 3, 2018). 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=3071018 or http://dx.doi.org/10.2139/ssrn.3071018

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel R. Carvalho (Contact Author)

Indiana University - Kelley School of Business ( email )

Bloomington, IN 47405
United States

Taehyun Kim

University of Notre Dame - Department of Finance ( email )

259 Mendoza College of Business
Notre Dame, IN Indiana 46556-0399
United States
574-631-1492 (Phone)

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