Paper #1237

Títol:

Credit constraints, firms' precautionary investment and the business cycle

Autor:

Ander Pérez Orive

Data:

Setembre 2010

Resum:

This paper studies the macroeconomic implications of firms' investment composition choices in the presence of credit constraints. Following a negative and persistent aggregate productivity shock, firms shift into short-term investments because they produce more pledgeable output and because they help alleviate future borrowing constraints. This produces a short-run dampening of the effects of the shock, at the expense of lower long-term investment and future output, relative to an economy with no credit market imperfections. The effects are exacerbated by a steepening of the term structure of interest rates that further encourages a shift towards short-term investments in the short-run. Small temporary shocks to the severity of financing frictions generate large and long-lasting effects on output through their impact on the composition of investment. A positive financial shock produces much stronger effects than an identical negative shock, while the responses to positive and negative shocks to aggregate productivity are roughly symmetric. Finally, the paper introduces a novel explanation for the countercyclicality of financing constraints of firms.

Paraules clau:

Investment composition, Financial frictions, Business cycles, Idiosyncratic production risk, Firm heterogeneity

Codis JEL:

D92, E22, E32, E44, G31, G32.

Àrea de Recerca:

Finances i Comptabilitat

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