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Corporate Firms’ Financial Conditions and Investment in Latin America: Determinants and Measurement

Oscar Carvallo (), Jonathan Barboza Pineda () and Ignacio Garron ()

Monetaria, 2018, vol. VI, issue 1, 39-105

Abstract: For our research, we used a large dataset of nonfinancial firms from ten Latin American countries to assess leverage determinants and their dynamics. The results seem to be consistent with elements of both the trade-off and pecking order views. Also, the regression results show the presence of significant adjustment costs. According to our results, a firm’s leverage is significantly reduced in the face of rising interest rates, with feed-back effects. Furthermore, we observed that reducing tangible assets induces more volatility in the interest rates paid by firms in the future. Essentially, when we separate firms according to leverage level, it appears that these effects are stronger for the highly leveraged enterprises. Dynamically, in the case of increasing rates, there seems to be more risk associated with higher leverage. Our results show that this effect is manifested in higher volatility of interest rates and reduced collateral levels, potential asset liquidation and rapid deleveraging. The segments most likely affected are medium size firms and large firms with high costs of liquidation and high sunk costs, especially in the service sector. Firms operating in markets with unique products would also suffer. Traditional market-based indexes of financial conditions could be complemented by corporate indicators underlying the role of collateral, cash flows, and risk. Based on these findings we propose and calculate an index of corporate financial conditions for the region.

Keywords: corporate finance; Latin American firms, pecking order, trade-off theory, financial distress. (search for similar items in EconPapers)
JEL-codes: G3 G30 G31 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:cml:moneta:v:vi:y:2018:i:1:p:39-105