Firm investment and financial conditions in the euro area: evidence from firm-level data

We explore whether the sensitivity of firm-level investment to cash flow, typically associated with an external financing premium, is time-varying and in particular whether it varies with overall financial conditions. We find that financial conditions have indeed played a significant role in corpora...

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Bibliographic Details
Published in:Applied economics letters 2019-01, Vol.26 (2), p.104-110
Main Authors: Balfoussia, Hiona, Gibson, Heather D.
Format: Article
Language:English
Subjects:
Economic analysis
Economic models
Economic theory
Economics
euro area
financial conditions
Financing
firms
Investment
Investments
Leverage
Robustness
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Summary:We explore whether the sensitivity of firm-level investment to cash flow, typically associated with an external financing premium, is time-varying and in particular whether it varies with overall financial conditions. We find that financial conditions have indeed played a significant role in corporate investment decisions over recent years, rendering financing constraints even more binding. This finding appears to be robust to a number of control variables and robustness tests. Moreover, the impact of credit conditions is not uniform across firms, but rather it varies depending on firm size and leverage, with constrained firms being substantially more likely to condition their investment decisions on overall credit conditions. Our results cast new light on the interplay between financial and real cycle downturns and underline the need for monetary, fiscal and macroprudential policy to be countercyclical with respect to financial conditions.
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2018.1441496