Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis
Debt maturity structure is an important variable in understanding how credit supply shocks spread through the corporate sector.
In Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis (NBER Working Paper No. 14990), co-authors Heitor Almeida, Murillo Campello, Bruno Laranjeira, and Scott Weisbenner measure the effect of financial contracting on corporate outcomes following a shock to the supply of credit -- specifically the mortgage market crisis of August 2007. They find that in the immediate aftermath of such a shock, long-term financial contracts such as about-to-mature debt contracts can have a sizeable effect on firms' real and financial policies.
The authors use data compiled by COMPUSTAT, singling out over 1,000 robust firms capable of issuing long-term debt, and avoiding comparisons with weaker companies that would be shaken by a credit crunch in any event. They look particularly at the proportion of long-term debt that matured right after August 2007 in order to assess how firms are affected by credit contractions. They match firms that they would expect to be more susceptible to financial distress, those with debts coming due, with 'control' firms that they would expect to be less affected by a credit shock, namely firms with debt that matures at a future date.
The researchers first document the existence of pronounced variation in the maturity structure of long-term debt at the onset of the 2007 crisis, which stemmed from contracting decisions made several years prior to that credit shock. That variation in long-term debt maturity is persistent, with no sign of change in the years leading up to 2007. After matching firms on numerous characteristics, the researchers are also able to isolate firms with a large fraction of long-term debt maturing right after the crisis (the treated firms) that are virtually identical to other firms whose debt happens to mature in later years (the control firms). These groups of firms are identical across all of the characteristics that the researchers consider except for debt maturity structure. For example, the two groups of firms display similar investment rates in the three quarters immediately leading up to the crisis (7.8 percent of capital on a quarterly basis for the treatment group, and 7.3 percent for the control group).
For firms with long-term debt maturing just after the credit crisis, quarterly investment rates decrease to an average 5.7 percent of capital, a significant fall of 2.1 percent. In contrast, similar firms that did not have debt maturing do not decrease their investment; indeed, their quarterly investment-over-capital actually increases by 0.1 percent. Moreover, the relationship between the debt maturity structure and investment strengthens when the researchers focus on firms for which long-term debt is a more important source of financing; in that case, the drop in investment is 3.4 percent. As expected, the relationship disappears when they use firms with insignificant amounts of long-term debt.
The relationship between debt maturity structure and investment holds only for the period surrounding the recent financial crisis. Replicating their central tests, which involve data from 2007, for each year between 2000 and 2006, they find no relationship between debt maturity structure and investment. The only year in which investment rates differ for firms with and without substantial amounts of long-term debt maturing is at the end of 2007. This suggests that the negative effect of debt maturity on investment is indeed attributable to firms' inability to refinance the maturing portion of their long-term debt in the one period in recent years that experienced a pronounced credit squeeze.
The authors conclude that their unique, quasi-experimental methodology reveals a novel link between debt maturity structure and corporate investment. In particular, their analysis points to the importance of debt maturity structure in affecting corporate financial flexibility. Their results also provide evidence that the 2007 credit crisis had real effects on corporate behavior, and underscore that debt maturity structure is an important variable in understanding how credit supply shocks spread through the corporate sector.
-- Matt Nesvisky