In the fall of 2008, world financial markets were in the midst of a credit crisis of historic breadth and depth. In this paper, we provide a unique perspective of the impact of the crisis on the real decisions made by corporations in the United States, Europe, and Asia. While the crisis is dramatic and unfortunate, it provides an opportunity to study how financial constraints impact corporate behavior.
We survey 1,050 chief financial officers (CFOs) in the U.S., Europe, and Asia in December 2008. The crisis environment allows us to draw sharp contrasts between firms that are financially constrained versus those that are less so. We use this experimental design to study the effects on certain corporate spending and disbursement policies, liquidity management strategies, and corporate investment.
Most of the previous research on financial constraints is based on financial statement data filed by U.S. public companies. These papers often investigate the impact of constraints on investment policy, sometimes examining whether investment at constrained firm sis more likely to be driven by cash flows (because constrained firms are unable to borrow to pursue all available value-enhancing projects).1 Papers in this literature typically proxy for financial constraint with characteristics like small firm size, nondividend paying status, or poor credit ratings.
One distinguishing feature of our experiment is that we ask directly which firms are financially constrained. As we discuss below, this direct measure of financial constraint leads to more powerful contrasts of constrained versus unconstrained activity than do the traditional proxies for financial constraint. Other unique features of our experimental design are that we are able to examine both public and private companies, and also able to study European and Asian firms in addition to those in the U.S.
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The Real Effectsof Financial Constraints: Evidence froma Financial Crisis
