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The Business Cycle, Investor Sentiment, and Costly External Finance

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.

Author - R David Mclean , Mengxin Zhao
Journal - Journal of Finance

Source - https://www.jstor.org/stable/43611188