March 3, 2020

Recession planning for managers (part 3)

By Prof. David M. Frankel

A recession may be coming. Does this mean that you, a manager, should adjust your investment strategy?

In downturns, there is less lending, which may make it hard for you to fund basic operations. Obviously, one way to avoid this is to stockpile cash.

Another way is to build relationships with bankers. Beck et al (2019) find that firms with banking relationships were less credit constrained than other firms during the 2008–9 Global Financial Crisis, but not in the preceding boom times. They write:

“[This benefit of banking relationships] is stronger for young, small, and non-exporting firms, firms with no other sources of external finance, and firms that lack tangible assets.”

The last part of the quote highlights another way to help ensure access to credit: invest in tangible assets which can be pledged as collateral, rather than intangible assets that cannot.

An important example of an intangible asset is goodwill: it cannot be pledged since, if you default, the bank cannot “seize” your goodwill.

Thus, when a recession is in the winds, it is less worthwhile to build goodwill via expensive new marketing campaigns.

Rather, consider acquiring tangible assets such as other firms, machinery, and real estate – or simply stockpile cash, thus making credit unnecessary.