The Epidemiology of Financial Constraints and Corporate Investment

William Grieser, Ioannis Spyridopoulos, and Morad Zekhnini

♦ We show that a firm’s financial constraints trigger investment disruptions that propagate through the production network. Propagation effects account for about half of the total investment reduction due to constraints. Network rigidities such as high input specificity and the scarcity of alternative partners amplify these spillovers. Firms mitigate investment disruptions by supporting constrained partners through trade credit or equity stakes. To bolster identification, we employ a Network Regression Discontinuity Design that accounts for spillovers. Our estimates are robust to network measurement error, endogenous selection, and various constraint measures. The results demonstrate that interdependent investments amplify the consequences of capital-market frictions.

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