Investment and Financing Sensitivity of Large versus Small Firms to Industry Growth Shocks

60 Pages Posted: 27 Apr 2020 Last revised: 7 Mar 2022

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Vijay Yerramilli

University of Houston, C. T. Bauer College of Business

Date Written: February 15, 2022

Abstract

We examine the response of firm-level capital investment and financing policies to persistent industry-specific growth shocks, while controlling for the effect of aggregate shocks. A striking empirical finding is that investment of large firms is more sensitive to industry-specific shocks compared to that of smaller firms, whereas small firms exhibit greater investment sensitivity to aggregate shocks compared to large firms. Our empirical results are consistent with optimal investment and financing behavior of firms in a dynamic model of investment and financing that accounts for the growth potential of industry-specific shocks separately from the general impact of aggregate shocks on profits.

Keywords: Industry business cycle, capital investment, financing, manufacturing

JEL Classification: E32, G31, G32

Suggested Citation

Kumar, Praveen and Yerramilli, Vijay, Investment and Financing Sensitivity of Large versus Small Firms to Industry Growth Shocks (February 15, 2022). Available at SSRN: https://ssrn.com/abstract=3567451 or http://dx.doi.org/10.2139/ssrn.3567451

Praveen Kumar

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Vijay Yerramilli (Contact Author)

University of Houston, C. T. Bauer College of Business ( email )

Houston, TX 77204
United States
713-743-2516 (Phone)

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