Seminar

Credit Cycles, Expectations, andCorporate Investment

Stefano Rossi (Bocconi University)

September 23, 2019, 12:30–14:00

Toulouse

Room MS001

Finance Seminar

Abstract

Credit Cycles, Expectations, andCorporate Investment We study the real eects of credit market sentiment on corporate investment and nancing for a comprehensive panel of U.S. public and private rms over 1963-2016. In the short term, we nd that high credit market sentiment in year t correlates with high corporate investment and debt issuance in year t+1, particularly for nancially constrained rms. In the longer term, high credit market sentiment in year t correlates with a decline in debt issuance in years t+3 and t+4; and with a decline in corporate investment in years t + 4 and t + 5. This pattern of increased investment in the short term and declined investment in the longer term is more pronounced for rms with larger analysts' earnings forecast revisions and comes with larger analysts' forecast errors, supporting theories of over-extrapolation of fundamentals into the future. A parsimonious dynamic model where over-extrapolation is the only departure from standard Q-theory does a good job matching the empirical moments of our data.