Credit supply constraints and financial policies of listed companies during the 2007–2009 financial crisis

This study examines the effects of lending constraints on the financial policies of UK publicly listed companies during the 2007–2009 financial crisis. Using a sample of 2039 publicly listed firms, the results of ouranalysis indicate that financial policies of firms are sensitive to variations in the supply of external finance and credit, suggesting that liquidity-constraint firms with low cash reserves suffered more at the time of the creditcrunch. While managing through the potential negative effects of the financial crisis, majority of the sample companies increased the use of internal finance and deferred the payments of dividends which helped them applyeffective financial policies during the crisis period. The findings of this study also document that during the crisis period, financial policies of firms were exposed to variations in the supply of finance and credit, which, byimplication, posed a threat to their operations, sustainability and growth. Our findings produce awareness about the negative effects of the non-availability of external finance and credit supply to listed companies, and signifythe role of different financing channels and credit system in the operations and growth of listed companies. These findings have implications for financial regulation and policy making in the UK