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The Firm-Level Credit Multiplier

Murillo Campello and Dirk Hackbarth

No 17805, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the effect of asset tangibility on corporate financing and investment decisions. Financially constrained firms benefit the most from investing in tangible assets because those assets help relax constraints, allowing for further investment. Using a dynamic model, we characterize this effect - which we call firm-level credit multiplier - and show how asset tangibility increases the sensitivity of investment to Tobin's Q for financially constrained firms. Examining a large sample of manufacturers over the 1971-2005 period as well as simulated data, we find support for our theory's tangibility-investment channel. We further verify that our findings are driven by firms' debt issuance activities. Consistent with our empirical identification strategy, the firm-level credit multiplier is absent from samples of financially unconstrained firms and samples of financially constrained firms with low spare debt capacity.

JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-bec
Note: CF
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Published as Campello, Murillo & Hackbarth, Dirk, 2012. "The firm-level credit multiplier," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 446-472.

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