SSRN-The Real Effects of Financial Constraints: Evidence from a Financial Crisis by Murillo Campello, John Graham, Campbell Harvey

Here is the paper we were talking about yesterday in class when we relaxed the Modigliani and Miller assumptions of no transaction costs and allowed there to be market imperfections. The conclusion was that financial slack may be more valuable than we used to think.

SSRN-The Real Effects of Financial Constraints: Evidence from a Financial Crisis by Murillo Campello, John Graham, Campbell Harvey:

"Our evidence shows that the impact of the financial crisis is severe on credit constrained firms, leading to deeper cuts in planned R&D, employment, and capital spending. These firms also burn through more cash, draw more heavily on lines of credit for fear banks will restrict access in the future, and sell more assets to fund their operations. Using our direct measure of constraints, we also find that the inability to borrow externally causes many firms to bypass attractive investment projects, with 86% of constrained U.S. CFOs saying their investment in attractive projects has been restricted during the credit crisis of 2008 and more than half outright cancelling or postponing their investment plans."