“In total, we've lost nearly 1.2 million jobs this year, and more than 10 million Americans are now unemployed. We are facing the greatest economic challenge of our lifetime.” (Fox News,2008) - in 2008 US president Barack Obama summarized the impact of the financial crisis on the US economy. The US construction industry, which accounts for approximately 8% of the overall GDP and employs 6.7 million workers, was adversely affected by the financial crisis (Research and Markets, 2010 - see figure 1). James Sudbury a consultant for the construction industries analyzed in August 2008: “The markets changed dramatically in the last three months. There
used to be plenty of money all over the street. Now, it's difficult to get it done with any major banks” (Ireland & Writer 2008). In conjunction with other relevant factors the significant
dependency on a high cash flow level, contradicting the money and capital market climate during the financial crisis, has strongly driven the negative economic trend of the industry.In order to examine the impact of the financial crisis on the US construction industry by business segment this paper first summarizes external influences and outlines basic principles of corporate finance.
Table of Contents
1 Introduction
2 Financial Crisis
3 Corporate Financial Management
4 Impact Financial Crisis on the Construction Industry
4.1 Overview
4.2 Small Businesses
4.3 Large and Medium-Sized Businesses
4.3.1 Analysis of Financial Key Performance Indicators and Ratios
4.3.2 Analysis of Financial Instruments
4.4 Cost of Capital
4.4.1 Cost of Debt
4.4.2 Cost of Equity
4.4.3 Weighted Average Cost of Capital
5 Conclusion
Objectives and Research Focus
This essay examines how the financial crisis and the resulting economic downturn impacted the financing mechanisms and financial stability of the US construction sector. The work analyzes these effects across different company sizes by evaluating external funding constraints, changes in corporate financial management strategies, and specific financial performance metrics during the period from 2006 to 2010.
- Analysis of funding challenges for small versus large construction firms.
- Evaluation of shifts in internal and external capital acquisition during the credit crisis.
- Assessment of financial key performance indicators (KPIs) and liquidity trends.
- Review of the efficacy of government stimulus packages within the industry.
- Examination of debt instruments and capital structure adjustments.
Excerpt from the Book
4.1 Overview
“Tighter credit standards may affect smaller construction businesses first. The small business contractor is not going to have access to as much external capital as a large contractor will” says a partner in Business Finance Solutions underlining the different levels the industry was impacted by the economic downturn (Ireland & Writer 2008). Hence, it is necessary to divide the analysis of the crisis’ aftermath into three parts, covering different sizes of companies. For the purpose of this project the number of employees is selected as the relevant classifier. In contrast to the precise guidelines promoted by the European Commission (European Commission, 2010) there are multiple approaches communicated by different US institutions (US Small Business Administration, 2010 & US Census Bureau’s, 2002). This paper aligns with the main direction promoted by the US Census Bureau’s, however, considering the specific characteristics of the construction industry, this definition is adapted slightly and applied for this paper as displayed in figure 5.
Summary of Chapters
1 Introduction: This chapter introduces the economic impact of the financial crisis on the US construction industry, highlighting the significant job losses and the industry's dependency on cash flow.
2 Financial Crisis: This section provides an overview of the US economic downturn, triggered by the real estate bubble collapse and the subsequent failure of financial markets to facilitate capital formation.
3 Corporate Financial Management: This chapter outlines basic principles of corporate finance, defining debt and equity financing as primary external resources for enterprises.
4 Impact Financial Crisis on the Construction Industry: This comprehensive chapter analyzes the crisis's aftermath, categorizing businesses by size and examining their specific financial challenges, liquidity management, and capital costs.
5 Conclusion: This chapter synthesizes the research findings, noting that while larger firms had better access to alternative funding, small businesses faced disproportionate difficulties, leading to widespread bankruptcies.
Keywords
US Construction Industry, Financial Crisis, Corporate Finance, Credit Access, Small Businesses, Debt Financing, Equity Capital, WACC, Capital Markets, Economic Downturn, Liquidity, Interest Rates, Stimulus Packages, Financial Ratios, Business Funding.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on how the US construction sector managed its financing needs during the credit boom and the subsequent credit crisis between 2006 and 2010.
What are the central thematic areas covered?
The study covers financial management, the impact of restricted credit access, the performance of specific KPIs, and the variations in capital structure across small, medium, and large construction firms.
What is the main research objective?
The objective is to examine how the financial crisis influenced business funding options and financial health in the US construction sector, specifically by analyzing how different company sizes coped with the liquidity crunch.
Which scientific methods were applied?
The authors utilized a combination of qualitative literature review and quantitative analysis of annual reports from selected construction firms to observe trends in financial metrics and capital usage.
What does the main body of the work address?
The main body investigates the segmentation of the industry, the reliance on bank credits versus equity, the impact on debt instruments, and the movement of various performance ratios such as EBIT and current liabilities to equity.
How are the key terms defining the paper?
The paper is characterized by terms related to financial distress, capital structure, construction sector segmentation, and macroeconomic influences on corporate debt.
Why were small businesses hit harder than large companies?
Small businesses lacked the informational opacity and financial power to access bond markets or private equity, making them heavily dependent on bank loans, which tightened significantly during the crisis.
How did large companies manage the lack of liquidity?
Large companies attempted to manage the situation by liquidating non-strategic assets, reducing investments, and utilizing their market power to squeeze suppliers for additional funding.
Did the government stimulus packages have a notable effect?
The introduction of the US fiscal stimulus package in 2009 provided some relief by partially compensating for lost project assignments, though poor sales and market uncertainty remained major challenges.
- Quote paper
- Patrick Daum (Author), Martin Rojas (Author), Jens Rüger (Author), 2011, Financing the business sector during the credit boom and the credit crisis, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/193421
