Brace for Another Crisis: Empirical Evidence from US Construction Industry and Firm Performance during and after 2007-2009 Global Financial Crisis

Abstract

Despite the strong connection between the construction industry and the economy, very little is known about how a nation's prevailing economic conditions affect the construction industry and firm performance. Building upon economic contagion literature, this research empirically investigates the effect of the 2007-2009 global financial crisis (i.e., prevailing economic conditions) on the United States (US) construction industry and firm performance. The authors performed the analysis of the joint test of contagion, crisis severity index, and student t-test using the daily stock index in the US market and the daily stock prices and annual financial data of 39 selected US construction firms between 1st January 2005 and 31st December 2012, spanning precrisis, crisis and postcrisis periods. The longitudinal empirical data, involving a total of 2084 data points for each firm and the US stock market, confirmed a widespread negative effect of the crisis on the US construction industry in a pattern that is consistent with the occurrence of major events (e.g., the collapse of Lehman Brothers); and this negative effect continued, with a lower level of severity, into the postcrisis period. Within the industry, the highly market-driven homebuilding firms are affected more significantly by the crisis than construction and engineering firms. These time series trends and patterns support the strong construction-economy nexus. Additionally, construction firms with poor financial positions (i.e., profitability, liquidity, leverage, and turnover ratios), especially liquidity positions, are likely to suffer more strongly from the crisis and its residual impact. Thus, to survive, recover from and prepare for future economic disturbances, such as those caused by the COVID-19 pandemic, construction firms should closely monitor and manage their capabilities to generate revenue and repay their debt - that is to maintain sound cash flows. In this regard, practical recommendations are made accordingly. Theoretically, this research contributes to the understanding of the heterogeneous effect of economic conditions on the construction industry and firm performance and its contributing contextual factors.