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The Dynamic Relation between Financial Positions and Investment: Evidence from Company Account Data

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  • Stanca, Luca
  • Gallegati, Mauro

Abstract

A key feature of recent financial business cycle theories is the existence of a two-way dynamic relation between financial factors and investment: over time firms' financial positions are affected by, and in turn affect, investment decisions. This paper investigates the dynamic interaction between financial conditions and investment by estimating and testing vector autoregressions on company account panel data for US manufacturing firms, while considering explicitly sectional and time heterogeneity. The results show that indicators of liquidity and solvency contain significant predictive information for investment at the firm level. We also find evidence of both cross-sectional and time heterogeneity: the role played by financial factors is significantly more important for highly leveraged than for low-debt firms, capital market frictions are shown to have asymmetric effects over the business cycle, displaying a larger impact in contractions than in expansions. Overall, the evidence supports the hypothesis that capital market imperfections have an important role in explaining aggregate cyclical dynamics. Copyright 1999 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Industrial & Corporate Change.

Volume (Year): 8 (1999)
Issue (Month): 3 (September)
Pages: 551-72

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Handle: RePEc:oup:indcch:v:8:y:1999:i:3:p:551-72

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Cited by:
  1. Domenico Delli Gatti, Mauro Gallegati, Gianfranco Giulioni, Antonio Palestrini, -DISCUSSANT: Thomas Brenner, 2000. "Financial Fragility, Patterns Of Firms' Entry And Exit And Aggregate Dynamics," Computing in Economics and Finance 2000, Society for Computational Economics 282, Society for Computational Economics.
  2. Ruggero GRILLI & Gabriele TEDESCHI & Mauro GALLEGATI, 2012. "Markets connectivity and financial contagion," Working Papers, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali 382, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  3. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(2), pages 190-210, May.
  4. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Fundamentals, Financial Factors and The Dynamics of Investment in Emerging Markets," NIPE Working Papers, NIPE - Universidade do Minho 19/2009, NIPE - Universidade do Minho.
  5. Love, Inessa & Zicchino, Lea, 2002. "Financial development and dynamic investment behavior : evidence from panel vector autoregression," Policy Research Working Paper Series, The World Bank 2913, The World Bank.
  6. Alexander Coad, 2007. "Disentangling the firm growth process: evidence from a recursive panel VAR," Papers on Economics and Evolution, Philipps University Marburg, Department of Geography 2007-15, Philipps University Marburg, Department of Geography.

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