Asset Substitution and Capital Use by Firms Facing Financial Repression

Paul Natke

International Journal of the Economics of Business, 2008, vol. 15, issue 1, 129-145

Abstract: Firm behavior is examined during a period of financial repression in Brazil. Empirical findings indicate that firms experiencing rising inflation rates: (1) increase their capital stock while reducing liquid asset holdings; (2) experience increases in the productivity of capital (i.e. a rise in the output-capital ratio); (3) increase the scale of the firm's operations both because of the rising capital productivity and the greater quantity of capital; (4) most firms increase liquid asset holdings as they expand production, although Brazilian firms do so at about twice the rate of multinational firms; (5) do not change overall inventory holdings; however, inventories increase as output rises for multinational firms while for Brazilian firms inventories decrease as output rises; and (6) firms that are more likely to face financial constraints expand their scale of operations at a faster rate as they accumulate more debt.

Keywords: Complementarity Hypothesis; Capital Utilization; Asset Substitution; Financial Repression (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/13571510701830564

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