Survive another day: does uncertain financing affect the composition of investment?

We expect firms that face uncertainty about their access to the financial markets to prioritize shorter term investments over longer term ones. Using a high quality panel data set, and a difference-in-differences approach to control for demand effects, we study whether this has been indeed the case after the sharp deterioration of the financial conditions for firms in the European periphery. Specifically, we compare Spanish manufacturing firms which are foreign owned (and thus have alternative financing channels) to those which are Spanish owned (and thus financially constrained) along a large number of dimensions before and after the financial crisis. We show that, allowing for firm fixed effects to control for unobserved heterogeneity and for industry specific time effects, firms which are capital constrained reduce employment substantially more (by 6); reduce investment drastically (by 19); and reduce very substantially process innovation and information technology investment; but they increase their information technology outsourcing and do not significantly reduce advertising. This suggests lack of access to financing is indeed forcing Spanish owned firms to cut future oriented investments in order to survive for another day. Our findings are robust to a number of alternative approaches to control for unobserved, time varying heterogeneity, e.g. inverse propensity score reweighting, or comparing only within multinationals.