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The Business Cycle, Investor Sentiment, and Costly External Finance
Author(s) -
MCLEAN R. DAVID,
ZHAO MENGXIN
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12047
Subject(s) - recession , cash flow , business cycle , monetary economics , limiting , investment (military) , economics , debt , finance , financial crisis , external financing , business , macroeconomics , mechanical engineering , politics , political science , law , engineering
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.