Costly external finance, corporate investment, and the subprime mortgage credit crisis

Abstract

article in press journal of financial economics 97 (2010) 418–435 contents lists available at sciencedirect journal of financial economics journal homepage: www.elsevier.com/locate/jfec costly external finance, corporate investment, and the subprime mortgage credit crisis$ ran duchin a, oguzhan ozbas b, berk a. sensoy c,(cid:2) a university of michigan, stephen m. ross school of business, ann arbor, mi 48109, usa b university of southern california, marshall school of business, los angeles, ca 90089, usa c ohio state university, fisher college of business, columbus, oh 43210, usa a r t i c l e i n f o a b s t r a c t we study the effect of the recent financial crisis on corporate investment. the crisis represents an unexplored negative shock to the supply of external finance for nonfinancial firms. corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. to address endogeneity concerns, we measure firms’ financial positions as much as four years prior to the crisis, and confirm that similar results do not follow placebo crises in the summers of 2003–2006. nor do similar results follow the negative demand shock caused by september 11, 2001. the effects …

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