Financial Consolidation, Corporate Finance and Firm Investment in the Business Cycle

70 Pages Posted: 4 Jun 2021

See all articles by Sotirios Kokas

Sotirios Kokas

University of Essex - Essex Business School

Raoul Minetti

Michigan State University

Timothy Moreland

University of North Carolina (UNC) at Greensboro - Department of Economics

Date Written: June 4, 2021

Abstract

We study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for US firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium-sized publicly-traded firms. Using matched firm-bank data, we uncover evidence that bank consolidation contributed to this change. We rationalize these findings through a general equilibrium business cycle model with financial frictions calibrated to US data. After bank consolidation, the weakening in firms' bargaining power and relational ties with banks enhances firms' precautionary demand for liquidity and equity issuance incentives following positive shocks. The change in financing behavior increases investment sensitivity to aggregate productivity shocks.

Keywords: Financial frictions, business cycles, corporate finance, investment

JEL Classification: E22, E32, E44, G32

Suggested Citation

Kokas, Sotirios and Minetti, Raoul and Moreland, Timothy, Financial Consolidation, Corporate Finance and Firm Investment in the Business Cycle (June 4, 2021). Available at SSRN: https://ssrn.com/abstract=3859861 or http://dx.doi.org/10.2139/ssrn.3859861

Sotirios Kokas (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Raoul Minetti

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Timothy Moreland

University of North Carolina (UNC) at Greensboro - Department of Economics ( email )

Greensboro, NC 27402-6165
United States

HOME PAGE: http://timothymoreland.com

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
109
Abstract Views
516
Rank
441,482
PlumX Metrics