Strategic Management during the Financial Crisis: How Firms Adjust their Strategic Investments in Response to Credit Market Disruptions

We investigate how U.S. companies adjusted their investments in key strategic resources ― i.e., human capital, tangible, and intangible resources ― during the Great Recession of 2007-2009. To obtain exogenous variation in the severity of the recession, we exploit the differential intensity of the house price collapse across U.S. regions, instrumenting changes in house prices with Saiz’ (2010) topological measure of housing supply elasticity. Our findings indicate that companies significantly laid off employees and curtailed capital expenditures. Importantly though, they did not reduce investments in R&D and corporate social responsibility (CSR). We further document that firms that sustained their R&D and CSR performed better once the economy recovered. These findings confirm our theoretical arguments suggesting that intangible strategic resources such as innovation capability and stakeholder relations are instrumental in sustaining a competitive advantage during (and beyond) times of crisis.