Featured Research

from universities, journals, and other organizations

Slash In Corporate Investment Creating Long-term Problems

Date:
February 3, 2009
Source:
University of Illinois at Urbana-Champaign
Summary:
A deep and lingering credit crisis is throttling investment in moneymaking projects that could help jump-start a US economy mired in its worst downturn in decades, a new survey of corporate executives shows.

A deep and lingering credit crisis is throttling investment in moneymaking projects that could help jump-start a U.S. economy mired in its worst downturn in decades, a new survey of corporate executives shows.

Related Articles


University of Illinois and Duke University researchers found that nearly 60 percent of 569 U.S. firms surveyed are financially strapped by the credit crunch, netting layoffs and other cost-cutting moves that weaken an already hobbled economy.

The survey also shows that tight lending is forcing nearly 90 percent of those credit-constrained firms to pass up potentially lucrative projects that could boost earnings, employment and the overall economy.

“We see what firms are doing in the aftermath of the credit crisis, but we don’t see what they’re not doing,” said U. of I. finance professor Murillo Campello. “And what this research shows is that what they’re not doing is pursuing projects that could help build and sustain the U.S. economy for the next 10 years.”

As part of a survey project conducted jointly with CFO magazine, chief financial officers of 1,050 companies in the U.S., Europe and Asia were polled in December, asking whether their firms have been pinched by an ongoing credit crisis and how tight lending is affecting operations.

The study, co-written by finance professors John Graham and Campbell Harvey of Duke’s Fuqua School of Business, found stark contrasts between U.S. firms constrained by the financial crisis compared with those with easier access to credit.

Among the findings:

  • Just a few months into the crisis, constrained firms had burned through an average 20 percent of their cash holdings to pay suppliers, salaries and other operating expenses. Companies with access to credit had not touched cash reserves, keeping those firms on more solid financial footing.
  • Nearly 17 percent of constrained firms have drawn on lines of credit – stockpiling cash out of fear that access could be limited in the future – compared with just 5 percent of unconstrained companies.

“This is a frightening trend,” Harvey said. “Yes, credit is limited, but firms that hoard funds right now, instead of using them for investments and operations, are directly contributing to the downward cycle of the economy.”

  • Constrained firms plan cuts in operating costs this year that are roughly twice as deep as unconstrained firms. That includes slashing employment by 11 percent, research and development by 22 percent, marketing by 33 percent and dividends by 14 percent. Campello says the forecasts are likely conservative.

“Typically, CFOs are confident, they have a positive bias,” he said. “So if they say the cut will be 10 percent, it’s probably more like 20 percent.”

  • A whopping 86 percent of constrained firms say they bypass attractive value-building investments because of the credit crisis, compared with about half that many among unconstrained firms. The study also found that 56 percent of constrained firms reported they would cancel investment projects if external financing were unavailable, compared with 31 percent of unconstrained firms.

“In the scramble for short-term cash flow, firms are sacrificing long-term value,” the researchers wrote. “This implies lower future growth opportunities and lower future employment growth.”

  • Financially constrained firms in Europe and Asia are making many of the same cost-cutting moves as their U.S. counterparts, according to the survey.

Campello says the findings signal that the recession might linger longer than once thought, perhaps stretching into 2010.

“What this reveals is that the damage the credit crisis is causing to the corporate sector is perhaps much bigger than just the latest unemployment figures or stock-market prices would tell you,” he said.

Researchers say the study is likely the first to directly assess the impact of credit limitations through self-reports from CFOs. Typically, affects are gauged through a retrospective review of financial statements.

“Having this information helps us learn more about how companies make investment and financing decisions, and in this case revealed some startling details about the way corporations are responding to the crisis,” Graham said.

Campello says the unique survey could help guide the government’s efforts to ease the flow of credit.

“A one-size-fits-all solution that treats constrained and unconstrained firms the same might prolong the crisis,” he said. “Targeted solutions may be more effective, helping banks identify sectors most in need of money, the sectors that are throwing away good projects by the dozens.”


Story Source:

The above story is based on materials provided by University of Illinois at Urbana-Champaign. Note: Materials may be edited for content and length.


Journal Reference:

  1. Murillo Campello et al. The Real Effects of Financial Constraints: Evidence From a Financial Crisis. Social Science Research Network, [link]

Cite This Page:

University of Illinois at Urbana-Champaign. "Slash In Corporate Investment Creating Long-term Problems." ScienceDaily. ScienceDaily, 3 February 2009. <www.sciencedaily.com/releases/2009/02/090203110523.htm>.
University of Illinois at Urbana-Champaign. (2009, February 3). Slash In Corporate Investment Creating Long-term Problems. ScienceDaily. Retrieved November 24, 2014 from www.sciencedaily.com/releases/2009/02/090203110523.htm
University of Illinois at Urbana-Champaign. "Slash In Corporate Investment Creating Long-term Problems." ScienceDaily. www.sciencedaily.com/releases/2009/02/090203110523.htm (accessed November 24, 2014).

Share This


More From ScienceDaily



More Science & Society News

Monday, November 24, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Symantec Uncovers Sophisticated Spying Malware Regin

Symantec Uncovers Sophisticated Spying Malware Regin

Newsy (Nov. 24, 2014) A Symantec white paper reveals details about Regin, a spying malware of unusual complexity which is believed to be state-sponsored. Video provided by Newsy
Powered by NewsLook.com
Hackers Target Business Travellers

Hackers Target Business Travellers

Reuters - Business Video Online (Nov. 24, 2014) A newly detected malware, dubbed Darkhotel, infects hotel networks with spying software to steal sensitive data from the computers of high profile business executives, warns a leading computer security firm. Ciara Lee reports. Video provided by Reuters
Powered by NewsLook.com
NY Gov. on Flood Prep: 'prepared for the Worst'

NY Gov. on Flood Prep: 'prepared for the Worst'

AP (Nov. 23, 2014) First came the big storm. Now comes the big melt for residents of flood-prone areas around Buffalo. New York's governor says officials are preparing for the worst as the temperature is expected to rise and potentially melt several feet of snow. (Nov. 23) Video provided by AP
Powered by NewsLook.com
Indians Muck in for Cleaner Communities

Indians Muck in for Cleaner Communities

AFP (Nov. 22, 2014) India's government is urging all citizens to come together in a mass movement to clean the nation -- but will people heed the call? Duration: 02:39 Video provided by AFP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins