Abstract - Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis

We use the 2007 credit crisis to gauge the effect of financial contracting on real corporate behavior. We identify heterogeneity in financial contracting at the onset of the crisis by exploiting ex-ante variation in long-term
debt maturity structure. Our empirical methodology accounts for observed and unobserved (time-invariant) firm characteristics using a difference-in-differences matching estimator. We find that firms whose long-term debt was largely maturing right after the third quarter of 2007 cut investment by 2.5 percentage points more
(on a quarterly basis) than otherwise similar firms whose debt was scheduled to mature well after 2008. This relative decline in investment is statistically and economically significant, representing one-third of pre-crisis
investment levels. A number of falsification and placebo tests confirm our inferences. For example, in the absence of a credit shock (“normal times”), the maturity composition of long-term debt has no effect on investment. Likewise, maturity composition has no impact on investment in the crisis for firms for which long-term debt is not a major source of funding. Our analysis highlights the importance of debt maturity for corporate financial policy. More than showing a general association between credit markets and real activity, our analysis shows how that relation operates through a specific feature of financial contracting.

Murillo Campello
University of Illinois at Urbana-Champaign
01.Jun 2010

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