Earnings-based borrowing constraints & corporate investments in 2007–2009 financial crisis

Ankitkumar Kariya

Journal of Corporate Finance, 2022, vol. 75, issue C

Abstract: Recent work on the debt composition of non-financial firms finds that most of the large firms’ debt is cash flow-based with earnings-based borrowing constraints (EBCs), limiting the maximum debt relative to firms’ EBITDA. During the 2007–2009 crisis, EBCs tightened in the leveraged loan market. Consistent with the reduction in the supply of credit, I find that investments and debt issues of firms with binding EBCs reduce significantly compared to control firms. Furthermore, firms with binding EBCs cut their share repurchases and total payout during the crisis. In the cross-section, the reduction in investments and total payout is larger in the subsample of firms whose marginal borrowings are more likely to come from cash flow-based debt.

Keywords: Earnings-based borrowing constraints; Global financial crisis; Leveraged loan market; Cash flow-based debt; Corporate investments; Credit supply; Debt issues; Payout; Share repurchases (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:75:y:2022:i:c:s0929119922000700

DOI: 10.1016/j.jcorpfin.2022.102227

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