Credit Cycles, Expectations, and Corporate Investment

82 Pages Posted: 8 May 2019

See all articles by Huseyin Gulen

Huseyin Gulen

Purdue University - Krannert School of Management

Mihai Ion

University of Arizona - Department of Finance

Stefano Rossi

Bocconi University; Krannert School of Management; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 9, 2019

Abstract

We study the real effects of credit market sentiment on corporate investment and financing for a comprehensive panel of U.S. public and private firms over 1963-2016. In the short term, we find that high credit market sentiment in year t correlates with high corporate investment and debt issuance in year t+1, particularly for financially constrained firms. In the longer term, high credit market sentiment in year t correlates with a decline in debt issuance in years t+3 and t+4; and with a decline in corporate investment in years t + 4 and t + 5. This pattern of increased investment in the short term and declined investment in the longer term is more pronounced for firms with larger analysts' earnings forecast revisions and comes with larger analysts' forecast errors, supporting theories of over-extrapolation of fundamentals into the future. A parsimonious dynamic model where over-extrapolation is the only departure from standard Q-theory does a good job matching the empirical moments of our data.

Keywords: credit-market sentiment, credit cycles, corporate investment, over-extrapolation

JEL Classification: E32, E44, G02, G12, G31

Suggested Citation

Gulen, Huseyin and Ion, Mihai and Rossi, Stefano, Credit Cycles, Expectations, and Corporate Investment (April 9, 2019). Available at SSRN: https://ssrn.com/abstract=3369295 or http://dx.doi.org/10.2139/ssrn.3369295

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Mihai Ion

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
5206210737 (Phone)

Stefano Rossi (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Krannert School of Management ( email )

West Lafayette, IN 47907-1310
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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