Cycles and Corporate Investment: Direct Tests Using Survey Data on Banks’ Lending Practices

Jakob Madsen and Sarah Carrington

No 18-11, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: Microeconomic studies have found cash flow to be important for the investment decision and this result is often interpreted as is evidence of adverse selection in credit markets. Using direct survey evidence on banks’ willingness to lend, this research examines the role of credit in the investment decision while allowing for cash-flow, Tobin’s q, income, uncertainty and default risks. Regression analysis reveals that banks’ willingness to lend, income and uncertainty are the key drivers of cyclical fluctuations in corporate investment. These results have important implications for the conduct of monetary policy as well as research on business cycles.

Keywords: credit constraints; corporate investment; Tobin’s q (search for similar items in EconPapers)
JEL-codes: E22 E5 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011-09
New Economics Papers: this item is included in nep-ban, nep-hme and nep-mac
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Citations: View citations in EconPapers (1)

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