The 2007-2009 Financial Crisis: Changing Market Dynamics and the Impact of Credit Supply and Aggregate Demand Sensitivity

Abstract

This paper highlights the impact of credit supply and aggregate demand sensitivity on 91 US industries' stock performance during the 2007-2009 financial crisis. We account explicitly for changes in the market model and investigate, next to stock returns, the changes in systematic risk and idiosyncratic return induced by the financial crisis. The results show that leverage has a significantly positive effect on systematic risk changes during the financial crisis. After accounting for the change in systematic risk, the crisis induced idiosyncratic return is significantly related to industry leverage and the industry's sensitivity to aggregate demand. A subsequent analysis shows that both leverage and demand sensitivity have economically large effects on industry performance during the crisis.

Demand or supply shock during the COVID-19 crisis: empirical evidence from public firms in Indonesia

“…The dynamics described by Grammatikos and Vermeulen (2014) can be found in control firms, where their cash reserve also increased during the Covid-19 crisis. The results of DID and ATT show no significant difference in the increasing cash holdings between control and treated firms (see Table 6, Panel B).…”

“…We can further see that, during the pandemic, firms increased their cash reserve while reducing capital expenditure. According to Grammatikos and Vermeulen (2014), in times of crisis, firms are pressured by shareholders to reduce leverage and increase cash holding to protect them from innovation in volatility.…”

“…According to Grammatikos and Vermeulen (2014), during crisis, firms are pressured by shareholders to reduce leverage and increase cash reserves to protect them from innovations in volatility. However, from the results obtained in the previous section, we find that the position of treated firms' debt increased during the Covid-19 crisis.…”

Firm financial performance during the financial crisis: A French case study

“…Arslan‐Ayaydin, Florackis, and Ozkan (2014) suggested that the measure of financial flexibility is specific to the region, which may be explained by the fact that different regions often choose varied macroeconomic policies and directions in diverse economic situations. Grammatikos and Vermeulen (2014) found that a crisis worsens the financial health of firms by leading to higher sensitivity to summation demand shocks and banking sector problems, and insufficient investment in operations. Thus, the innovativeness of the region in which a firm is located contributes to firm performance (Burrus, Edward Graham, & Jones, 2018).…”

Self-Fulfilling Dynamics: The Interactions of Sovereign Spreads, Sovereign Ratings and Bank Ratings During the Euro Financial Crisis

“…A key finding of the literature is the following: the various fundamental variables that have been used in attempts to explain spreads have not able to account for either the very low spreads (measured relative to German sovereigns) that prevailed in the years preceding the outbreak of the euro-area crisis in 2009 or the very sharp rise in spreads that took place following the onset of the crisis. The general finding that spreads overshot (relative to the fundamentals) in a downward direction before the crisis and in an upward direction after the crisis holds regardless of (a) the mix of fundamental variables used to explain spreads and (b) whether the fundamentals are supplemented with additional variables --for example, measures of contagion (Grammatikos and Vermeulen, 2014), measures of credit risk (Annaert, De Ceuster, Van Roy and Vespro, 2013), and/or sovereign credit ratings (Gibson, Hall, and Tavlas, 2014;Aizenman, Binici and Hutchison 2013;Afonso, Furceri, and Gomes, 2012). Moreover, this finding is robust to the particular country sample and/or time period used, and the estimation procedure employed.…”