Investment decisions by European firms and financing constraints
Andrea Mercatanti (),
Taneli Mäkinen () and
No 1148, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area
We reinvestigate the question of whether corporate investment during the financial crisis depended to a significant extent, and differently than in the pre-crisis period, on firms' short-term liquidity and indebtedness. Using data on listed firms in the euro area and the United Kingdom, we employ a correlated random coefficient panel data model estimated with instrumental variables in order to address potential endogeneity concerns. First, we find that to attain plausible identification, we must allow for the possibility that the unobserved firm-specific component of investment changed with the onset of the financial crisis. Second, our results suggest that neither cash reserves nor short-term debt, considered separately, were significant determinants of investment. However, we do find evidence of a negative conditional dependence between corporate investment and short-term debt net of cash reserves.
Keywords: capital expenditure; financing constraints; financial crisis; correlated random coefficient; panel data models; instrumental variables (search for similar items in EconPapers)
JEL-codes: G01 G31 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-eec and nep-sbm
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