Access to Capital, Investment, and the Financial Crisis$
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Journal of Financial Economics 110 (2013) 280–299 Journal of Financial Economics journal homepage: www.elsevier.com/locate/jfec Access to capital, investment, and the financial crisis$ Kathleen M. Kahle a, René M. Stulz b,c,d,* a University of Arizona, Eller College of Management, Tucson, AZ 85721, USA b The Ohio State University, Fisher College of Business, 806 Fisher Hall, Columbus, OH 43210, USA c National Bureau of Economic Research (NBER), Cambridge, MA 02138, USA d European Corporate Governance Institute (ECGI), 1180 Brussels, Belgium article info abstract Article history: During the recent financial crisis, corporate borrowing and capital expenditures fall Received 24 April 2012 sharply. Most existing research links the two phenomena by arguing that a shock to bank Received in revised form lending (or, more generally, to the corporate credit supply) caused a reduction in capital 5 September 2012 expenditures. The economic significance of this causal link is tenuous, as we find that (1) Accepted 4 October 2012 bank-dependent firms do not decrease capital expenditures more than matching firms in Available online 24 February 2013 the first year of the crisis or in the two quarters after Lehman Brother's bankruptcy; (2) JEL classification: firms that are unlevered before the crisis decrease capital expenditures during the crisis as G31 much as matching firms and, proportionately, more than highly levered firms; (3) the G32 decrease in net debt issuance for bank-dependent firms is not greater than for matching firms; (4) the average cumulative decrease in net equity issuance is more than twice the Keywords: average decrease in net debt issuance from the start of the crisis through March 2009; and Financial crisis Credit supply (5) bank-dependent firms hoard cash during the crisis compared with unlevered firms. & Credit constraints 2013 Elsevier B.V. All rights reserved. Corporate borrowing Cash holdings Corporate investment Bank relationships 1. Introduction ☆ We thank Christian Leuz, Cathy Schrand, Berk Sensoy, and Mike Theories of impaired access to capital dominate expla- Weisbach for useful discussions and two anonymous referees, Viral nations of how losses on subprime mortgages led to the Acharya, V. V. Chari, Rudi Fahlenbrach, Jarrad Harford, Jean Helwege, worst recession since the Great Depression and provided Vince Intintoli, Darius Palia, Francisco Perez-Gonzalez, Robert Prilmeier, the foundation for a wide range of policy measures during David Scharfstein, Andrei Shleifer, and participants at the Fall 2010 the crisis, including the Troubled Asset Relief Program Corporate Finance meeting of the National Bureau of Economic Research, the 2011 Association of Financial Economists meetings in Denver, Color- implemented in 2008. The most prominent is the bank ado, the Wharton Conference on Liquidity and Financial Crises, and at lending supply shock theory, which holds that bank losses seminars at Arizona State University, Boston College, the Federal Reserve from “toxic” assets reduced the supply of loans to non- Board, Harvard University, Ohio State University, Rutgers University, the financial firms [see, for instance, Brunnermeier (2009) and University of Amsterdam, the University of Rotterdam, and the University of Tilburg for useful comments. We are also grateful to Jia Chen, Yeejin Shleifer and Vishny (2010)]. With a bank lending supply Jang, Robert Prilmeier, and Matt Wynter for excellent research assistance. shock, capital expenditures and net debt issuance should We are especially indebted to Harry DeAngelo for discussions and fall more for bank-dependent firms. A broader theory is detailed comments. n that the crisis led to a shock to the supply of credit Corresponding author at: The Ohio State University, Fisher College of generally (Gorton, 2010). This theory has similar predic- Business, 806 Fisher Hall, Columbus, OH 43210, USA. Tel.: þ1 614 292 1970; fax: þ1 614 292 2359. tions, but for credit-dependent firms instead of bank- E-mail address: [email protected] (R.M. Stulz). dependent firms only. While much attention has been 0304-405X/$ - see front matter & 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.jfineco.2013.02.014 K.M. Kahle, R.M. Stulz / Journal of Financial Economics 110 (2013) 280–299 281 devoted to these theories of impaired access to capital, a 2006. We have two additional groups of bank-dependent demand shock can explain both a decrease in capital firms, namely, highly levered firms that have bank loans at expenditures and a decrease in debt issuance, but without the end of both 2005 and 2006, and small firms with no a causal link between the two. This demand shock theory credit rating that have bank loans at the end of those same states that a shock to demand resulting from the loss of years. The credit supply shock theory implies that firms housing wealth (Mian and Sufi, 2010), a decrease in that rely on credit should be more affected. We use firms consumer credit, and the panic following Lehman Broth- that are highly levered before the crisis to test this idea. er's failure, among other reasons, led to a decrease both in Both theories of impaired access to capital predict that the firms' desired investment and in their demand for funding firms that do not rely on credit before the crisis should be to finance investment. Finally, the collateral channel or impacted less by the crisis than those that rely on credit. balance sheet multiplier effect of the corporate finance We use firms that consistently have no leverage in the 12 literature [see Brunnermeier and Oehmke (2013) for a quarters ending in June 2006, as well as firms that have review] predicts that the shock to firms' net worth that consistent high cash holdings over these quarters, to proxy took place during the crisis reduced capital expenditures for firms that are not dependent on credit before the crisis. and borrowing for levered firms because they had less The literature uses two different approaches to inves- collateral against which to borrow. Everything else equal, tigate the evolution of capital expenditures during the this effect is stronger for more highly levered firms. crisis. Almeida, Campello, Laranjeira and Weisbenner In this paper, we use cross-sectional variation in (2012) use a matching approach to compare the evolution changes in firm investment and financing policies during of capital expenditures of treated firms relative to their the crisis to investigate whether these changes are con- control group during the crisis. Duchin, Ozbas and Sensoy sistent with the view that a bank-lending shock or a credit (2010) estimate regressions in which they assess the supply shock, as opposed to a demand shock, is a first- impact of the crisis on a specific group of firms by order determinant of these policies and whether the interacting an indicator variable for these firms with an balance sheet multiplier made the impact of the crisis indicator variable for the crisis. Using both approaches, we worse on levered firms. We consistently find that the data show that, during the first year of the crisis, neither net are not supportive of the view that a bank-lending or debt issuance nor capital expenditures fall more for firms credit supply shock plays a major role in decreasing firms' that are dependent on bank finance or credit before the capital expenditures in the year before the fall of Lehman, crisis than for matching firms. Bank-dependent firms which we call the first year of the crisis (i.e., the last two experience a decrease in their net equity issuance during quarters of 2007 and the first two quarters of 2008). the first year of the crisis, which is inconsistent with them The first year of the crisis has been viewed in the literature using equity issuance to offset a bank lending shock. as a period particularly well suited to examine the impact No evidence exists that highly levered firms experience a of a credit supply shock because firm policies are less decrease in capital expenditures during the first year of the affected by demand effects as the recession does not start crisis. In sum, the evidence during the first year of the until December 2007 (e.g., Duchin, Ozbas and Sensoy, crisis is not supportive of the impaired access to capital 2010). Further, our evidence is not consistent with an theories. The evidence on the capital expenditures of economically large balance sheet multiplier effect. More highly levered firms is also inconsistent with the balance generally, we show that the capital expenditures of firms sheet multiplier having a strong impact in the first year of evolve in strikingly similar ways during the crisis irrespec- the crisis. tive of how they finance themselves before the crisis. The two quarters after the bankruptcy of Lehman are Theories of the crisis that emphasize pervasive effects sharply different from the first year of the crisis and offer across firms irrespective of their leverage are more con- another opportunity to test the implications of the sistent with our evidence. A common shock to the demand theories of impaired access to capital. We consider these for firms' products and an increase in uncertainty about two quarters separately to allow for the impact of the future demand could lead to a pervasive decrease in financial panic that followed the bankruptcy of Lehman. capital expenditures that would not depend on the finan- We refer to them as the post-Lehman period. They cial characteristics of firms. This is what we find. are characterized both by an extraordinary decrease in As we discuss more extensively in the next section, if net debt issuance and by a large decrease in capital the bank lending shock is a first-order determinant of firm expenditures. investment and financing policies during the crisis, we Whether looking at raw statistics, matching estimators, would expect bank-dependent firms to experience a or regressions, the decreases in capital expenditures of greater decrease in capital expenditures than other firms firms that do not rely on leverage before the crisis and early in the crisis.