2007-08 Economic Crisis Impact on Investments

The economic crisis and ensuing credit supply great shock that began in August 2007 was distinguished partly by the largest and the majority of persistent drop in real individual nonresidential equipment and software investment growth considering that the Bureau of Economic Analysis (BEA) started out data collection in 1947. At the same time, aggregate cash holdings as a new share of total assets for nonfinancial corporations were at the 30-year high as the turmoil began, which should have provided firms having a very large cushion to absorb any shock for the supply of credit. These data (from the Bureau of Economic Analysis as well as the Federal Reserve’s Flow of Funds) are generally plotted in Figure 1. A similar picture for your rising trend in cash holdings is visible using Compustat data, which often covers only publicly traded businesses.

In this paper we seek to shed light on two basic questions: 

1) What role did cash and its attributes play in the investment performance of firms during what has been called the Great Recession, and how might this compare with its function in previous recession and “credit crunch” assaults (Bernanke and Lown 1991)? and

 2) In terms of investment, what are the characteristics of firms that have been hardest hit during the most up-to-date recession? In particular, we seek to contribute to the present policy debate regarding the have to restore the flow of credit ratings to small firms (Bernanke 2010, Duygen-Bump, Levkov, along with Montoriol-Garriga 2010), although our results argue that your broad-based policy to ease credit conditions more generally is also helpful.

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