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The Business Cycle, Investor Sentiment, and Costly External Finance

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  • R. DAVID MCLEAN
  • MENGXIN ZHAO

Abstract

type="main"> The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time-varies and, if so, what are the real effects. Consistent with time-varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.

Suggested Citation

  • R. David Mclean & Mengxin Zhao, 2014. "The Business Cycle, Investor Sentiment, and Costly External Finance," Journal of Finance, American Finance Association, vol. 69(3), pages 1377-1409, June.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:3:p:1377-1409
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    File URL: http://hdl.handle.net/10.1111/jofi.12047
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