Corporate investment in the global financial crisis
Abstract
This paper exams the impact of high levels of bank debt, leverage, credit obtained from government banks and cash reserves in the long and short terms investments of firms in the main Latin American countries after this crisis. For this purpose, it is applied a difference-in-differences test in a sample of more than 500 public and private firms, using hand-collected data of firms’ governmental bank dependence. The review period considers five previous (2003–2007) and subsequent years (2008–2012) to the crisis. The major results are reduction of long-term investments for firms with greater banking dependence, as well as short-term investments for firms with a higher level of cash reserves. Besides, firms that are more reliant on government-owned banks reduce capital expenditures. Differently from other studies, this one examines the impact of the last global financial crisis on the firms´ investment, considering its dependence of bank debt of institutions that belongs to the government or not. Understanding the mechanisms available to emerging economies can shed light on new countercyclical policies of governments and changes in the legislations of the financial system.
Keyword : financial crisis, corporate investment, bank dependence, state-owned banks, cash holding, government’s countercyclical policy, differences-in-differences
How to Cite
Jucá, M., & Fishlow, A. (2021). Corporate investment in the global financial crisis . Journal of Business Economics and Management, 22(3), 636-655. https://doi.org/10.3846/jbem.2021.14548
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Berger, A. N., & Roman, R. A. (2015). Did TARP banks get competitive advantages? Journal of Financial and Quantitative Analysis, 50(6), 1199–1236. https://doi.org/10.1017/S0022109015000630
Bo, H., Driver, C., & Lin, H.-C. M. (2014). Corporate investment during the financial crisis: Evidence from China. International Review of Financial Analysis, 35, 1–12. https://doi.org/10.1016/j.irfa.2014.07.002
Bonomo, M., Brito, R. D., & Martins, B. (2015). The after crisis government-driven credit expansion in Brazil: A firm level analysis. Journal of International Money and Finance, 55, 111–134. https://doi.org/10.1016/j.jimonfin.2015.02.017
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Carvalho, D., Ferreira, M. A., & Matos, P. (2015). Lending relationships and the effect of bank distress: Evidence from the 2007–2009 financial crisis. Journal of Financial and Quantitative Analysis, 50(6), 1165–1197. https://doi.org/10.1017/S0022109015000551
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Fernández, A. I., González, F., & Suárez, N. (2018). Bank supply shocks and the substitution between bank and nonbank debt. Journal of Corporate Finance, 48, 122–147. https://doi.org/10.1016/j.jcorpfin.2017.10.010
Geyt, D. V, Cauwenberge, P. V., & Bauwhede, H. V. (2013). The impact of the financial crisis on insider trading profitability in Belgium. Journal of Business Economics and Management, 14(2), 364–385. https://doi.org/10.3846/16111699.2011.652980
González, F. (2016). Creditor rights, bank competition, and corporate investment during the global financial crisis. Journal of Corporate Finance, 37, 249–270. https://doi.org/10.1016/j.jcorpfin.2016.01.001
Guevara, J. F., Maudos, J., & Salvador, C. (2021). Effects of the degree of financial constraint and excessive indebtedness on firms’ investment decisions. Journal of International Money and Finance, 110, 102288. https://doi.org/10.1016/j.jimonfin.2020.102288
Institute of Applied Research. (2011). The role of federal public banks in the Brazilian economy, no. 1604. Text for discussion. http://www.ipea.gov.br/portal/index.php?option=com_content&view=article&id=8058
Ivashina, V., & Scharfstein, D. (2010). Bank lending during the financial crisis of 2008. Journal of Financial Economics, 97(3), 319–338. https://doi.org/10.1016/j.jfineco.2009.12.001
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kahle, K. M., & Stulz, R. M. (2013). Access to capital, investment, and the financial crisis. Journal of Financial Economics, 110(2), 280–299. https://doi.org/10.1016/j.jfineco.2013.02.014
Keynes, J. M (1936). The general theory of employment, interest and money. Harcourt, Brace & World. https://doi.org/10.1007/978-3-319-70344-2
Khan, M. K., He, Y., Kaleem, A., Akram, U., & Hussain, Z. (2018). Remedial role of financial development in corporate investment amid financing constraints and agency costs. Journal of Business Economics and Management, 19(1), 176–191. https://doi.org/10.3846/16111699.2017.1422797
Lee, M.-J. (2016). Matching, regression discontinuity, difference in differences, and beyond. Oxford University Press. https://doi.org/10.1093/acprof:oso/9780190258733.001.0001
Mercatanti, A., Mäkinen, T., & Silvestrini, A. (2019). The role of financial factors for European corporate investment. Journal of International Money and Finance, 96, 246–258. https://doi.org/10.1016/j.jimonfin.2019.05.006
Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39(3), 575–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Ocampo, J. A. (2009). Latin America and the global financial crisis. Cambridge Journal of Economics, 33(4), 703–724. https://doi.org/10.1093/cje/bep030
Paula, L. F., Oreiro, J. L., & Basilio, F. A. C. (2013). Banking sector structure and the recent credit expansion cycle: The role of federal public banks. Nova Economia, 23(3), 473–520. https://doi.org/10.1590/S0103-63512013000300001
Ramezani, C. A. (2011). Financial constraints, real options and corporate cash holdings. Managerial Finance, 37(12), 1137–1160. https://doi.org/10.1108/03074351111175074
Roberts, M. R., & Whited, T. M. (2013). Endogeneity in empirical corporate finance. In Handbook of the economics of finance (pp. 493–572). Elsevier. https://doi.org/10.1016/B978-0-44-453594-8.00007-0
Shiau, H.-L., Chang, Y.-H., & Yang, Y.-J. (2018). The cash holdings and corporate investment surrounding financial crisis: The cases of China and Taiwan. The Chinese Economy, 51(2), 175–207. https://doi.org/10.1080/10971475.2018.1447833
Shleifer, A., & Vishny, R. (2010). Unstable banking. Journal of Financial Economics, 97(3), 306–318. https://doi.org/10.1016/j.jfineco.2009.10.007
Silva, T. C., Tabak, B. M., & Laiz, M. (2020). The finance-growth nexus: The role of banks. Economic Systems, 100762 (in Press). https://doi.org/10.1016/j.ecosys.2020.100762
Tong, H., & Wei, S. (2008). Real effects of the subprime mortgage crisis: Is it a demand or a finance shock? (International Monetary Fund Working Paper 186). International Monetary Fund. https://doi.org/10.5089/9781451870442.001
Tsuruta, D. (2019). Working capital management during the global financial crisis: Evidence from Japan. Japan & The World Economy, 49, 206–219. https://doi.org/10.1016/j.japwor.2019.01.002
Williams, A. (2018, December 10). Are you ready for the financial crisis of 2019? New York Times. https://www.nytimes.com/2018/12/10/style/2019-financial-crisis.html
Wójcik, D., & Cojoianu, T. F. (2018). Resilience of the US securities industry to the global financial crisis. Geoforum, 91, 182–194. https://doi.org/10.1016/j.geoforum.2018.02.035
World Bank. (2020a). GDP growth (annual %). DataBank. World Development Indicators. https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
World Bank. (2020b). Gross capital formation (annual % growth). DataBank. World Development Indicators. https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
World Bank. (2020c). Gross capital formation (% of GDP). DataBank. World Development Indicators. https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
Zubair, S., Kabir, R., & Huang, X. (2020). Does the financial crisis change the effect of financing on investment? Evidence from private SMEs. Journal of Business Research, 110, 456–463. https://doi.org/10.1016/j.jbusres.2020.01.063
Ahn, J., Amiti, M., & Weinstein, D. E. (2011). Trade finance and the great trade collapse. American Economic Review, 101(3), 298–302. https://doi.org/10.1257/aer.101.3.298
Anderson, S. (2019). A history of the past 40 years in financial crises. International Financing Review, 2000 issue supplement. http://www.ifre.com/a-history-of-the-past-40-years-in-financial-crises/21102949.fullarticle
Angrist, J., & Pischke, J. S. (2008). Mostly harmless econometrics. Princeton University Press. https://doi.org/10.2307/j.ctvcm4j72
Bacen – Banco Central do Brasil. (2014). Bank economy and credit report of 2014. https://www.bcb.gov.br/publicacoes/relatorioeconomiabancaria/11122014
Bacen – Central Bank of Brazil. (2020). Time series management system. Credit indicators. Balances by capital control. Balances under public control – Total.
Berg, T., & Gider, J. (2017). What explains the difference in leverage between banks and nonbanks? Journal of Financial and Quantitative Analysis, 52(6), 2677–2702. https://doi.org/10.1017/S0022109017000734
Berger, A. N., & Roman, R. A. (2015). Did TARP banks get competitive advantages? Journal of Financial and Quantitative Analysis, 50(6), 1199–1236. https://doi.org/10.1017/S0022109015000630
Bo, H., Driver, C., & Lin, H.-C. M. (2014). Corporate investment during the financial crisis: Evidence from China. International Review of Financial Analysis, 35, 1–12. https://doi.org/10.1016/j.irfa.2014.07.002
Bonomo, M., Brito, R. D., & Martins, B. (2015). The after crisis government-driven credit expansion in Brazil: A firm level analysis. Journal of International Money and Finance, 55, 111–134. https://doi.org/10.1016/j.jimonfin.2015.02.017
Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007–2008. Journal of Economic Perspectives, 23(1), 77–100. https://doi.org/10.1257/jep.23.1.77
Campello, M., Giambona, E., Graham, J. R., & Harvey, C. R. (2012). Access to liquidity and corporate investment in Europe during the financial crisis. Review of Finance, 16(2), 323–346. https://doi.org/10.1093/rof/rfr030
Campello, M., Graham, J. R., & Harvey, C. R. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470–487. https://doi.org/10.1016/j.jfineco.2010.02.009
Carvalho, D., Ferreira, M. A., & Matos, P. (2015). Lending relationships and the effect of bank distress: Evidence from the 2007–2009 financial crisis. Journal of Financial and Quantitative Analysis, 50(6), 1165–1197. https://doi.org/10.1017/S0022109015000551
Chava, S., & Purnanandam, A. (2011). The effect of banking crisis on bank-dependent borrowers. Journal of Financial Economics, 99(1), 116–135. https://doi.org/10.1016/j.jfineco.2010.08.006
Chen, X., Le, C. H. A., Shan, Y., & Taylor, S. (2020). Australian policy uncertainty and corporate investment. Pacific-Basin Finance Journal, 61, 101341. https://doi.org/10.1016/j.pacfin.2020.101341
Cortes, G. S., Silva, T., & Van Doornik, B. F. N. (2019). Credit shock propagation in firm networks: Evidence from government bank credit expansions (BCB Working Paper no. 507). Central Bank of Brazil. https://econpapers.repec.org/paper/bcbwpaper/507.htm
Cox, J. (2019). Global debt is up 50% over the past decade, but S&P still says next crisis won’t be as bad.
CNBC. www.cnbc.com/2019/03/12/global-debt-up-50-percent-since-the-financial-crisis-sp-says.html
Dieese – Intersindical Department of Statistics and Socioeconomic Studies. (2014). O Mercado de Trabalho Formal Brasileiro: Resultados da RAIS 2013 [The Brazilian formal labor market: RAIS results 2013]. No. 140. https://www.dieese.org.br/notatecnica/2014/notaTec140Rais2013.pdf
Duchin, R., Ozbas, O., & Sensoy, B. A. (2010). Costly external finance, corporate investment, and the subprime mortgage credit crisis. Journal of Financial Economics, 97(3), 418–435. https://doi.org/10.1016/j.jfineco.2009.12.008
Fernández, A. I., González, F., & Suárez, N. (2018). Bank supply shocks and the substitution between bank and nonbank debt. Journal of Corporate Finance, 48, 122–147. https://doi.org/10.1016/j.jcorpfin.2017.10.010
Geyt, D. V, Cauwenberge, P. V., & Bauwhede, H. V. (2013). The impact of the financial crisis on insider trading profitability in Belgium. Journal of Business Economics and Management, 14(2), 364–385. https://doi.org/10.3846/16111699.2011.652980
González, F. (2016). Creditor rights, bank competition, and corporate investment during the global financial crisis. Journal of Corporate Finance, 37, 249–270. https://doi.org/10.1016/j.jcorpfin.2016.01.001
Guevara, J. F., Maudos, J., & Salvador, C. (2021). Effects of the degree of financial constraint and excessive indebtedness on firms’ investment decisions. Journal of International Money and Finance, 110, 102288. https://doi.org/10.1016/j.jimonfin.2020.102288
Institute of Applied Research. (2011). The role of federal public banks in the Brazilian economy, no. 1604. Text for discussion. http://www.ipea.gov.br/portal/index.php?option=com_content&view=article&id=8058
Ivashina, V., & Scharfstein, D. (2010). Bank lending during the financial crisis of 2008. Journal of Financial Economics, 97(3), 319–338. https://doi.org/10.1016/j.jfineco.2009.12.001
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kahle, K. M., & Stulz, R. M. (2013). Access to capital, investment, and the financial crisis. Journal of Financial Economics, 110(2), 280–299. https://doi.org/10.1016/j.jfineco.2013.02.014
Keynes, J. M (1936). The general theory of employment, interest and money. Harcourt, Brace & World. https://doi.org/10.1007/978-3-319-70344-2
Khan, M. K., He, Y., Kaleem, A., Akram, U., & Hussain, Z. (2018). Remedial role of financial development in corporate investment amid financing constraints and agency costs. Journal of Business Economics and Management, 19(1), 176–191. https://doi.org/10.3846/16111699.2017.1422797
Lee, M.-J. (2016). Matching, regression discontinuity, difference in differences, and beyond. Oxford University Press. https://doi.org/10.1093/acprof:oso/9780190258733.001.0001
Mercatanti, A., Mäkinen, T., & Silvestrini, A. (2019). The role of financial factors for European corporate investment. Journal of International Money and Finance, 96, 246–258. https://doi.org/10.1016/j.jimonfin.2019.05.006
Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39(3), 575–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Ocampo, J. A. (2009). Latin America and the global financial crisis. Cambridge Journal of Economics, 33(4), 703–724. https://doi.org/10.1093/cje/bep030
Paula, L. F., Oreiro, J. L., & Basilio, F. A. C. (2013). Banking sector structure and the recent credit expansion cycle: The role of federal public banks. Nova Economia, 23(3), 473–520. https://doi.org/10.1590/S0103-63512013000300001
Ramezani, C. A. (2011). Financial constraints, real options and corporate cash holdings. Managerial Finance, 37(12), 1137–1160. https://doi.org/10.1108/03074351111175074
Roberts, M. R., & Whited, T. M. (2013). Endogeneity in empirical corporate finance. In Handbook of the economics of finance (pp. 493–572). Elsevier. https://doi.org/10.1016/B978-0-44-453594-8.00007-0
Shiau, H.-L., Chang, Y.-H., & Yang, Y.-J. (2018). The cash holdings and corporate investment surrounding financial crisis: The cases of China and Taiwan. The Chinese Economy, 51(2), 175–207. https://doi.org/10.1080/10971475.2018.1447833
Shleifer, A., & Vishny, R. (2010). Unstable banking. Journal of Financial Economics, 97(3), 306–318. https://doi.org/10.1016/j.jfineco.2009.10.007
Silva, T. C., Tabak, B. M., & Laiz, M. (2020). The finance-growth nexus: The role of banks. Economic Systems, 100762 (in Press). https://doi.org/10.1016/j.ecosys.2020.100762
Tong, H., & Wei, S. (2008). Real effects of the subprime mortgage crisis: Is it a demand or a finance shock? (International Monetary Fund Working Paper 186). International Monetary Fund. https://doi.org/10.5089/9781451870442.001
Tsuruta, D. (2019). Working capital management during the global financial crisis: Evidence from Japan. Japan & The World Economy, 49, 206–219. https://doi.org/10.1016/j.japwor.2019.01.002
Williams, A. (2018, December 10). Are you ready for the financial crisis of 2019? New York Times. https://www.nytimes.com/2018/12/10/style/2019-financial-crisis.html
Wójcik, D., & Cojoianu, T. F. (2018). Resilience of the US securities industry to the global financial crisis. Geoforum, 91, 182–194. https://doi.org/10.1016/j.geoforum.2018.02.035
World Bank. (2020a). GDP growth (annual %). DataBank. World Development Indicators. https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
World Bank. (2020b). Gross capital formation (annual % growth). DataBank. World Development Indicators. https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
World Bank. (2020c). Gross capital formation (% of GDP). DataBank. World Development Indicators. https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
Zubair, S., Kabir, R., & Huang, X. (2020). Does the financial crisis change the effect of financing on investment? Evidence from private SMEs. Journal of Business Research, 110, 456–463. https://doi.org/10.1016/j.jbusres.2020.01.063