TY  - JOUR
AU  - Campello,Murillo
AU  - Hackbarth,Dirk
TI  - The Firm-Level Credit Multiplier
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17805
PY  - 2012
Y2  - February 2012
UR  - http://www.nber.org/papers/w17805
L1  - http://www.nber.org/papers/w17805.pdf
N1  - Author contact info:
Murillo Campello
Johnson Graduate School of Management
Cornell University
114 East Avenue
369 Sage Hall
Ithaca, NY 148531-6201
Tel: 607-255-1282
E-Mail: campello@cornell.edu

Dirk Hackbarth
Associate Professor of Finance
University of Illinois at Urbana-Champaign
515 East Gregory Drive, 4035 BIF
Champaign, IL, 61820
Tel: (217) 333-7343
Fax: (217) 244-3102
E-Mail: dhackbar@uiuc.edu
AB  - We study the effect of asset tangibility on corporate financing and investment decisions. Financially constrained firms benefit the most from investing in tangible assets because those assets help relax constraints, allowing for further investment. Using a dynamic model, we characterize this effect – which we call firm-level credit multiplier – and show how asset tangibility increases the sensitivity of investment to Tobin’s Q for financially constrained firms. Examining a large sample of manufacturers over the 1971-2005 period as well as simulated data, we find support for our theory’s tangibility–investment channel. We further verify that our findings are driven by firms’ debt issuance activities. Consistent with our empirical identification strategy, the firm-level credit multiplier is absent from samples of financially unconstrained firms and samples of financially constrained firms with low spare debt capacity.
ER  -