Financial Policies and the Financial Crisis: How Important was the Systemic Credit Contraction for Industrial Corporations?

Abstract

We thank Christian Leuz, Cathy Schrand, Berk Sensoy, and Mike Weisbach for useful discussions, and Matt Wynter for excellent research assistance. We are especially indebted to Harry DeAngelo for discussions and detailed comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis

“…Other than in 2008Q1, both groups of firms were able to maintain a fairly steady industry-adjusted cash ratio throughout the sample period. This result may seem surprising in light of the findings in Ivashina and Scharfstein (2010b) and Kahle and Stulz's (2010) that firms significantly increased their cash holdings after Lehman's bankruptcy. In unreported analysis where we do not adjust for industry, we also find that firms' cash ratios increased after the peak of the financial crisis, although not by much.…”

“…The rationale for the division is that, during the later stage of the crisis, it is difficult to discern the extent to which changes in firms' investment behavior are attributable to changes in external financing and the extent to which they are a response to changes in investment opportunities. (Even though the financial crisis as such peaked during 2008Q4 and 2009Q1 (Ivashina and Scharfstein, (2010a, Kahle and Stulz (2010)), by then the crisis had spilled over to the demand side). On the other hand, any changes in investment behavior and outcomes observed during the earlier phase of the crisis can more confidently be attributed to the exogenous shock in external financing, which is what makes the recent crisis a particularly interesting research laboratory for studying the real effects of financial contracting.…”

Fire Sales in Finance and Macroeconomics

“…Why would pecuniary effects from mispricing not only transfer wealth from sellers to buyers of securities but also undermine physical capital investment? The financial crisis saw the decline of bank lending to firms and of real investment (Ivashina and Scharfstein, 2010;Campello, Graham, and Harvey;2010, Kahle andStulz, 2010). What can explain it?…”

Firms as liquidity providers: Evidence from the 2007–2008 financial crisis

“…Ivashina and Sharfstein (2010) show that firms draw down credit lines during the crisis, and face difficulties in renewing the lines. Kahle and Stultz (2010) find that firms change their financial policies significantly following the onset of the crisis. Our paper complements this literature by identifying another, to our knowledge still unexplored channel through which firms can partially offset the negative effects of the credit crunch.…”