Survive Another Day: Using Changes in the Composition of Investments to Measure the Cost of Credit Constraints

Abstract

Abstract-We introduce a novel empirical strategy to measure the size of credit shocks. Theoretically, we show that credit shocks reduce the value of long-term relative to short-term investments. Empirically, we can therefore compare the reduction of long-term relative to short-term investments within firms, allowing for firm-times-year fixed effects. Using Spanish firmlevel data, we estimate the credit crunch to be equivalent to an additional tax rate of around 11% on the longest-lived capital. To pin down credit constraints as the underlying cause, we apply triple-differences strategies using foreign ownership or precrisis debt maturity.

Foreign competition and the durability of US firm investments

“…Based on our sample of listed manufacturing firms, we find that increasing Chinese import competition reduced the most durable investments more than the least durable investments. The estimated economic significance of our estimates compares to the effect that Garicano and Steinwender () estimate for the financial crisis on investment of Spanish firms…”

“…As short‐term investments depreciate earlier, net investments tend to fall, and firms need to refinance more frequently . The literature has identified that credit crunches, uncertainty, investor pressures, or agency problems can be causal for short‐term investment behavior (see Aghion et al., ; Garicano and Steinwender, ; Terry, ; Garicano and Rayo, ; Bénabou and Tirole, ). In this article, we put forward another reason for corporate short‐termism: we argue that foreign competition can induce firms to distort investments away from assets that pay off in the distant future toward short‐term assets.…”

“…Furthermore, firms in US industries that are more low‐skill‐intensive in their production might also be affected more severely, because these industries face comparative disadvantages vis‐à‐vis Chinese producers. As listed firms disclose investment expenditures across different asset categories which differ in their durability, we can exploit variation in durability across asset groups to distinguish between short‐ and long‐term investments, similar to Garicano and Steinwender () . With the data at hand, we estimate how changes in the sectoral degree of competition lead to a shift of investments within firms.…”

The Long-Run Real Effects of Banking Crises: Firm-Level Investment Dynamics and the Role of Wage Rigidity

“…While their study is based on firm balance sheet data, I additionally make use of loan-level data containing detailed information on the maturity and expiration dates of individual loan facilities. Similar identification ideas have recently also been employed by Duval, Hong, and Timmer (2017) and Garicano and Steinwender (2016). not only negatively impact the supply of bank credit and the cost of bond finance, but also the commercial paper market (Kacperczyk and Schnabl, 2010) and firms' costs of issuing equity (Belo, Lin, and Yang, 2014).…”

Unions in a frictional labor market

“…But, as Reinhart and Rogo (2009) note, there is no denitive evidence on the causal eects. The natural experiment 3 Gan (2007); Khwaja and Mian (2008); Amiti and Weinstein (2011); Garicano and Steinwender (2013) ;Bentolila et al (2015); Paravisini et al (2015) present further evidence.…”