Balance Sheet Restructuring and Investment

Karen Mills, Steve Morling and Warren Tease
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Karen Mills: Reserve Bank of Australia
Steve Morling: Reserve Bank of Australia
Warren Tease: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: This paper looks at the evolution of corporate balance sheets and investment over the past few years. (Lowe and Shuetrim (1992) also provide information on the evolution of corporate gearing in the 1980s. This paper focuses on the more recent experience of balance sheet restructuring and investment.) We find that many companies have significantly improved their balance sheets in this time. Leverage has been reduced, and this, coupled with lower nominal interest rates, has improved the interest cover and cash flows of the corporate sector. For many firms, the process of balance sheet repair has proceeded a long way so that the extent to which the financial position of firms will impinge on investment is much lower than it was a few years ago. However, in the short term, some focus on financial restructuring may remain given the extent of excess capacity in the economy and a shift in incentives away from debt financing. Looking further ahead, it appears that the rate of return to investing in capital is relatively high, at least when judged against the standards of earlier downturns. As the recovery picks up pace we should, therefore, see firms more inclined to expand their capital expenditure and less focused on financial restructuring.

Date: 1993-06
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