Impact of Corporate Governance on Corporate Financing and Investment During the 2007-2008 Financial Crisis

Abstract

We study the impact of the 2007-2008 financial crisis on nonfinancial firms’ financing and investment and the role of corporate governance in mitigating the adverse consequences of the capital supply shock. Employing a difference-in-differences research design, we find that the credit crisis significantly affects firms’ financing and investment behavior in the first year after the onset of the crisis. However, the adverse effect on financing is mitigated for firms with better governance, and this translates into a smaller decline in these firms’ investment. The results are robust to extending the sample period to include the delayed spillover from the banking sector to other capital market sectors. Overall, the evidence supports the view that better governance mitigates the disruption caused by the external capital supply shock to firms’ normal courses of actions.