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Financial Policies, Investment, and the Financial Crisis: Impaired Credit Channel or Diminished Demand for Capital?

Author

Listed:
  • Kahle, Kathleen M.

    (University of AZ)

  • Stulz, Rene M.

    (OH State University)

Abstract
Though much of the narrative of the financial crisis has focused on the impact of a bank credit supply shock, we show that such a shock cannot explain important features of the financial and investment policies of industrial firms. These features are consistent with a dominant role for the increase in risk and the reduction in demand for goods that occurred during the crisis. The net equity issuance of small firms and unrated firms is abnormally low throughout the crisis, whereas an impaired credit supply by itself would have encouraged these firms to increase their net equity issuance. After September 2008, firms increase their cash holdings rather than use them to mitigate the impact of the credit supply shock. Firms that are more bank-dependent before the crisis do not reduce their capital expenditures more than other firms during the crisis. Finally, the evidence is strongly supportive of theories that emphasize the importance of collateral and corporate net worth in financing and investment policies, as firms with stronger balance sheets reduce capital expenditures less after September 2008.

Suggested Citation

  • Kahle, Kathleen M. & Stulz, Rene M., 2011. "Financial Policies, Investment, and the Financial Crisis: Impaired Credit Channel or Diminished Demand for Capital?," Working Paper Series 2011-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2011-3
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    References listed on IDEAS

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    Cited by:

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    2. Bucă, Andra & Vermeulen, Philip, 2017. "Corporate investment and bank-dependent borrowers during the recent financial crisis," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 164-180.
    3. Krainer, Robert E., 2014. "Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 283-298.
    4. Eric van Wincoop, 2013. "International Contagion through Leveraged Financial Institutions," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 152-189, July.
    5. Perera, Anil & Ralston, Deborah & Wickramanayake, J., 2014. "Impact of off-balance sheet banking on the bank lending channel of monetary transmission: Evidence from South Asia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 195-216.
    6. Driver, Ciaran & Muñoz-Bugarin, Jair, 2019. "Financial constraints on investment: Effects of firm size and the financial crisis," Research in International Business and Finance, Elsevier, vol. 47(C), pages 441-457.
    7. Erika Urbankova & David Krizek, 2020. "Homogeneity of Determinants in the Financial Sector and Investment in EU Countries," Economies, MDPI, vol. 8(1), pages 1-17, February.
    8. Hetland, Ove Rein & Mjøs, Aksel, 2012. "Credit supply shocks, financial constraints and investments for small and medium-sized firms," Discussion Papers 2012/11, Norwegian School of Economics, Department of Business and Management Science, revised 30 Mar 2018.
    9. Yujun Lian & Mohamad Sepehri & Maggie Foley, 2011. "Corporate Cash Holdings and Financial Crisis: An Empirical Study of Chinese Companies," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 112-124, December.
    10. Ander Perez & Andrea Caggese, 2014. "Aggregate implications of financial and labour market frictions," 2014 Meeting Papers 772, Society for Economic Dynamics.
    11. Holmberg, Karolina, 2013. "Lines of Credit and Investment: Firm-Level Evidence of Real Effects of the Financial Crisis," Working Paper Series 281, Sveriges Riksbank (Central Bank of Sweden).
    12. Rodriguez-Palenzuela, Diego & Dées, Stéphane & Andersson, Malin & Bijsterbosch, Martin & Forster, Katrin & Zorell, Nico & Audoly, Richard & Buelens, Christian & Compeyron, Guillaume & Ferrando, Annali, 2016. "Savings and investment behaviour in the euro area," Occasional Paper Series 167, European Central Bank.

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