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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : International Review of Financial Analysis , Volume 26, January 2013, Pages 59–70
This study examines how shocks to the supply of credit during the financial crisis of 2007–2009 affect the financing and investment policies of private companies in the United Kingdom. To investigate this issue we adopt a fixed effects model as our research methodology. Our final sample includes a total of 4973 firms. Our results highlight that the recent credit crisis has adversely affected the leverage ratio of private firms. This effect is most significant on short term financing channels such as short term debt and trade credit. As a consequence, private firms hold cash and issued equity for hedging the negative effect of credit contractions. However, no evidence was found on the issue of net debt issue or obtaining longer trade credit as substitutes for preserving their financial slack by the private firms. The results also revealed, that private firms did not scale back shareholder distribution in response to their financial difficulties. The results further highlight that credit contraction has negatively affected the performance and investment of private firms. Moreover, the increase in cash reserve and decrease in investment would suggest that firms may have raised funds through equity for managing their cash balances. Overall, the results highlight that financial and investment policies of private firms are susceptible to variations in the supply of credit and firms which are unable to find alternative sources of finance may bear a much larger cost compared to those who manage their financing more appropriately. Our findings have implications for the ongoing financial crisis as well as future policy designs by monetary and banking authorities.
The recent financial crisis, which sparked as a result of problems in the subprime market in the United States, is regarded by many researchers as the most severe financial crisis since the Great Depression (see for example, Kahle and Stulz, 2010, Melvin and Taylor, 2009 and Mian and Sufi, 2009). This crisis has affected not only financial markets and institutions, but also goods markets and consumers all over the world and has thus generated a global effect. It is thus well documented in some of the latest research papers that the 2007 US financial crisis has affected not only the stock market performance of the United Kingdom and Japan but also the stock market of emerging economies such as Malaysia and Indonesia (Majid & Kassim, 2009). In the UK, the effect of the financial crisis can be seen from the increased number of defaults in the financial sector. The early victims of the crisis were Northern Rock, Bradford and Bingley, Alliance and Leicester, HBOS and Cheshire and Derbyshire, building societies. Northern Rock, for example, after receiving an emergency loan from the Bank of England in September 2007 eventually went into state ownership in February 2008. Alliance and Leicester was taken over by the Spanish bank Santander in July 2008. In the same way, HBOS was taken over by Lloyds TSB in September 2008. This was followed by the nationalization of Bradford and Bingley in September 2008. In the same year Cheshire and Derbyshire building society was also taken over by Nationwide in September 2008 (Hall, 2008 and Hall, 2009). The defaults and disruptions in the financial markets increased awareness of the significance of risk management on the part of financial institutions. As a result the willingness and ability of financial institutions to take risks in lending were reduced. There is also evidence that financial institutions' terms and conditions for the issue of credit became tighter (Campello et al., 2011 and De Haas and van Horen, 2009). These disruptions to the financial markets raised an important issue of the spill-over effect of the financial crisis into other sectors and the real economy. In response to the crisis, a significant amount of research was undertaken by exploring the underlying causes of the crisis (Carmassi et al., 2009, Crotty, 2009 and Murphy, 2008). In addition, other studies have focused on the impact and consequences of the financial crisis (Greenlaw et al., 2008 and Mian and Sufi, 2009). However, evidence of the effects on firms' behaviour with respect to financing and investment decisions of firms is limited and the existing research literature has mainly concentrated on publicly listed large firms (see for example, Allen and Carletti, 2008, Duchin et al., 2010 and Tong and Wei, 2008, amongst others). Similarly, little attention has been paid to the effects of credit supply shocks on the financial and investment decisions of private firms,1 for which the number of external sources of finance are limited. It is, however, well documented that small and medium size firms2 are very important for economic growth, innovation, employment, revenue generation and technological advancement (Acs and Audretsch, 1990, Kotey and Meredith, 1997 and Neck and Dockner, 1987). It is also important to note that SMEs represent more than 90% of enterprise and account for more than half of the labour force in the OECD countries (Lukacs, 2005).3 Also, Brav (2009) highlights that private companies represent 98% of incorporated companies in the United Kingdom. However, despite their significant role in the economic development of the global economy, research on private firms is limited. In this regard, Zingales (2000) argues that ‘the emphasis on large companies has led us to ignore (or study less than necessary) the rest of the universe: the young and small firms, who do not have access to public markets’. In line with this Daskalakis and Psillaki (2008) argue that non-listed firms represent a huge majority of the population of firms in developed and developing countries and need more emphasis from researchers. Similarly, Hall et al. (2000) report a lack of research on SMEs and highlight the role of such research in the economy. Bartholdy and Mateus (2011) argue that the degree of information opacity and funding sources between private and public firms is different due to which further research about understanding the behaviour of private firms is needed to add new insights. Also, an in‐depth review of the existing literature has revealed that few studies have examined the effect of credit supply shocks on firms' financing mix, performance and investment decisions. Most importantly, in the context of the recent financial crisis, few studies have focused on private firms (see for example, Allen and Carletti, 2008, Duchin et al., 2010 and Tong and Wei, 2008) which may also signify the need for further research in this area. In addition, an in‐depth examination of the findings of the existing literature, would reveal that the majority of these studies provide mixed and inconclusive evidence (Allen and Carletti, 2008, Bakke, 2009, Duchin et al., 2010, Leary, 2009, Lemmon and Roberts, 2010 and Lin and Paravisini, 2010). This further highlights the need for more research in this area. In light of all the above‐mentioned discussion we argue that the impact of the current financial crisis on the financing and investment decisions of private firms appears to have scope for a thorough investigation. In addition to the above, we consider the United Kingdom for this investigation. This is because the majority of published studies have considered the United States (see for example, Chava and Purnanandam, 2011, Duchin et al., 2010, Lemmon and Roberts, 2010 and Lin and Paravisini, 2010). This may be due to the size of the US economy and the existence of a large body of researchers based in US academic institutions. However, it is also evident to argue that the United Kingdom being the sixth largest economy in the world with unique institutional features and financial reporting requirements for private firms also needs investigation. In addition, institutional differences such as the insolvency code, tax system and ownership structures (see for example, Beattie et al., 2006, Dahya and Travlos, 2000, Franks et al., 1996, Kaiser, 1996 and Rajan and Zingales, 1995) between the US and the UK, further justify the need for this research as an alternative source of evidence. This study therefore, investigates the financial and investment behaviour of private firms during the recent financial crisis of 2007–2009 in response to shocks to the supply of credit in the UK. To pursue such an investigation this study is making an in-depth analysis of the shock to the supply of credit and its effect on the leverage of private firms and tries to determine those components of capital structure which are affected most by credit supply contractions. The purpose of examining the components of capital structure individually is to comprehend the exact channel(s) through which credit supply shocks travel. It will also help to understand better the extent of substitution across credit sources. We also investigate how private firms managed their finances during the crisis period. In other words, we investigate how private firms minimize the effect of credit contractions by resorting to alternative sources of finance such as internal funds, net debt issue, net trade credit and net equity issue. Finally, we investigate the effect of credit contractions on the performance and investment behaviour of private firms in the UK. Investigating the effect of credit contractions on firm behaviour is important for two reasons. First, variations in the supply of credit may affect the financial and investment behaviour of firms, which is independent of any monetary policy shift (Duchin et al., 2010, Leary, 2009, Lemmon and Roberts, 2010 and Voutsinas and Werner, 2011). This has clear policy implications. It will also help to better understand how firms managed their financing and investment decisions during the crisis period. From another perspective, it may be helpful in diminishing the controversies in the existing literature on the above issues and would aid future researchers in this area. Second, there are differences in views about whether the firm's financing decisions tend to be governed by users' demand for capital or preferences of the supply of capital (Graham and Harvey, 2001 and Titman, 2002). However, the main challenge in estimating the effect of credit supply shocks on firms' financial and investment behaviour arises from clearly disentangling the credit supply effect from the endogenous demand effect (Chava and Purnanandam, 2011 and Gan, 2007). The simultaneity of corporate financing and investment decisions makes it a difficult task to identify clearly the supply shocks. To respond to this challenge, our identification strategy has three elements that helped to address this problem. The three elements are: identification of exogenous variations in the supply of credit; the use of the firm fixed effects model; and the use of firm level control variables. In addition, we also conduct a number of robustness checks to validate our results. The results show that the financial crisis has adversely affected the financial and investment decisions of private firms. It is also found that firms increase their cash balances and issue private equity in response to exogenous credit contractions. In addition, the crisis has negatively affected the investment strategies and operating performance of the sample companies. The rest of the paper is organized as follows. Section 2 presents a review of previous literature. Section 3 explains the research methodology and data, followed by a discussion of the results in Section 4. Section 5 concludes the paper by presenting a summary of the main findings of the study.
نتیجه گیری انگلیسی
This paper examines the effects of credit contractions on the financing and investment policies of private firms in the UK. The results suggest that credit supply shocks have adversely affected the total debt ratio of private firms. The results further highlight that credit contractions have impaired short term financing channels (such as short term debt and trade credit) while the credit crisis has no significant effect on the long term financing channel. As a consequence, private firms hold cash and issue equity to hedge themselves from the negative effect of credit contractions. We, however, do not find any evidence that private firms substitute to net debt issue or net trade credit. Nor do we find that these firms scaled back shareholder distributions. Similarly, the results also reveal that the non-availability of credit and the relative lack of substitution had adversely affected both performance and investment of private firms. Moreover, increases in cash reserves and decreases in investment suggest that funds raised through equity finance may have been used to finance the cash reserve. A number of robustness tests were also carried out that further validated our results. Overall, our results suggest that financing and investment policies of private firms are vulnerable to variations in the supply of credit which may have long-term implications for the survival of these firms. Despite the contributions this study makes, it contains certain limitations. The first limitation is the use of annual data. Due to the non-availability of quarterly data from the available databases, this study only uses annual data in the analyses. The use of quarterly data would however add new insights into the research findings and contributions. This notion is supported by the findings of Duchin et al. (2010) and Chava and Purnanandam (2011). In particular quarterly data on financing mix, performance and investment of firms would add more value to the outcome of this research. The second limitation is the duration of the study. At the time of the data collection process, data were only available up to the year 2009. Although the study covered the pre-crisis and crisis periods, it would be it would have been better if we could have extended the study to include the post-crisis period as well. Despite these limitations this study makes some useful contributions to the limited literature in this area of research. This study would encourage further research in this area. In particular, investigating the financing and investment decisions of firms during the post crisis period and comparing it with the pre-crisis and crisis periods could be an interesting area for future research. Future research should also consider the role of relationship lending during the crisis period. In this regard, existing evidence suggests that establishing a relationship with lenders enhances the availability of financing during the crisis period (Petersen & Rajan, 1994). In addition, it is also been argued in the literature that a longer relationship with the lender helps firms pay lower interest rates and pledge little or no collateral for loans (Boot & Thakor, 1994). Therefore, investigating the role of relationship lending during the crisis period could be another area for future research. In addition, the use of qualitative methodology could also provide more valuable insights and a better understanding of financing and investment decisions of firms from the perspective of managers and investors. However, these issues are left to future research.