Credit Cycles, Expectations, and Corporate Investment

105 Pages Posted: 8 May 2019 Last revised: 20 Feb 2024

See all articles by Huseyin Gulen

Huseyin Gulen

Mitchell E. Daniels, Jr School of Business, Purdue University; Purdue University - Krannert School of Management

Mihai Ion

University of Arizona - Department of Finance

Candace Jens

Syracuse University - Whitman School of Management

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2024

Abstract

We provide a systematic empirical assessment of the Minsky (1957) hypothesis that business fluctuations stem from irrational swings in expectations. Using predictable firm-level forecast errors,
we build an aggregate index of irrational expectations and use it to provide three sets of results.
First, we show that our index predicts aggregate credit cycles. Next, we show that these predictable
credit cycles drive cycles in firm-level debt issuance and investment and similar cycles between financially constrained and unconstrained firms, as Minsky (1957, 1977) predicts. Finally, we show more pronounced cycles in firm-level financing and investment for firms with ex ante more optimistic expectations

Keywords: Credit-market sentiment, credit cycles, corporate investment, over-extrapolation

JEL Classification: E32, E44, G02, G12, G31

Suggested Citation

Gulen, Huseyin and Ion, Mihai and Jens, Candace and Rossi, Stefano, Credit Cycles, Expectations, and Corporate Investment (February 15, 2024). Available at SSRN: https://ssrn.com/abstract=3369295 or http://dx.doi.org/10.2139/ssrn.3369295

Huseyin Gulen

Mitchell E. Daniels, Jr School of Business, Purdue University ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Mihai Ion

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
5206210737 (Phone)

Candace Jens

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

Stefano Rossi (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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