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.
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:
“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.”
“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.”
“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.”
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.”
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