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Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus

Sophia Chen () and Yinqiu Lu

No 2016/248, IMF Working Papers from International Monetary Fund

Abstract: Fixed investment was the most important contributing factor to the boom-bust cycle in Cyprus over the last decade. Investment boomed during a credit boom in mid-2000s, during which the corporate sector borrowed heavily. Investment collapsed after 2008 when the credit boom ended. Investment and corporate balance sheets further deteriorated during the Cypriot banking crisis over 2012–2014. Using firm-level investment and balance sheet data, we find that corporate indebtedness is negatively associated with investment both before and after the banking crisis, although the effect is weaker after the Cypriot banking crisis, possibly due to the reduced role of credit in driving post-crisis investment and growth. Our results suggest the need to repair corporate balance sheets to support sustainable invesetment.

Keywords: WP; cash holding; firm level; investment decision; index firm; leverage ratio; Cyprus; corporate investment; balance sheet; leverage Author’s; investment rate; x crisis; strength drives investment; balance sheet strength; leverage-investment linkage; debt maturity; NFC debt; Financial statements; Currencies; Wages; Banking crises; Southern Europe; Global; Europe (search for similar items in EconPapers)
Pages: 26
Date: 2016-12-22
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Journal Article: Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus (2018) Downloads
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