Professor Heitor Almeida, University of Illinois at Urbana Champaign, will discuss his paper and his role as Associate Editor for the Journal of Financial Intermediation and the Journal of Banking and Finance. He will become Managing Editor at the Journal of Corporate Finance in January 2021.
We propose and analyze a new mechanism through which financial frictions can affect firms’ operations and economic activity: the working capital credit multiplier. To isolate this multiplier, we propose an identification strategy that builds on cash flow seasonality and allows us to identify funding frictions in working capital without employing pure financial shocks, and in a way that is not confounded by changes in long-term investments. Our analysis provides evidence that some firms have limited capacity to fund working capital investments, which constraints their production capacity. This mechanism furthers our understanding of how funding frictions amplify and propagate the effects of economic shocks. (with Daniel Carvalho and Taehyun Kim)