Financial Frictions and Corporate Investment in Bad Times. Who Cut Back Most?

We present detailed stylized facts on European corporates during the period of financial and sovereign crisis. In particular, we observe that investment in fixed assets declined over the crisis period in all countries. To understand the determinants of corporate investment we implement an econometric analysis to specifically explore the differential impact of leverage and debt maturity structure on investment. We find that in crisis years (i) leverage exerts a strong and negative effect on the level of investment and (ii) firms with more long-term debt invest less. We also uncover heterogeneous reactions to crisis due to debt level and its maturity by sorting firms by country-specific and firm specific-characteristics. In particular, we find that firms who cut back most investment in crisis years (conditional on the level of leverage and maturity) are (i) located in Periphery countries and (ii) featured by a small-scale. Factors that help firms alleviate financial frictions and shield investment are reliance on multiple bank relationships and ability to generate internal resources (cash flows). We find no evidence of a positive nexus between cash and investment, and only little evidence of a positive effect on investment of access to capital markets, to mitigate the negative impact of debt in crisis years.