Financing Constraints and the Amplification of Aggregate Downturns

This paper studies the real effects of financing constraints during industry downturns, and provides direct evidence that these effects are significantly stronger at the aggregate level. I exploit ex-ante variation in the structure of long-term debt maturity and analyze a broad sample of COMPUSTAT firms. The results show that, conditional on firms' own debt maturity structure, firms in industries where long-term debt is largely maturing at the time of (unexpected) industry downturns experience lower asset growth during these downturns. This effect is concentrated in industries where assets are more specialized and is mostly driven by an increase in asset contractions. Among firms in a same industry, this effect is more important for firms with their own debt largely maturing during the downturn. Overall, the analysis suggests the quantitative importance of an industry-wide financial accelerator, where externalities among financially constrained firms amplify the real effects of aggregate (industry) downturns. The analysis is consistent with the view that these externalities are driven by the impact of asset prices on firms' balance sheets