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Investment Finance and Monetary Policy in Europe

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  • Cobham, Alex

    () (Finance and Trade Policy Research Centre, University of Oxford)

Abstract

This paper assesses the different investment responses to monetary policy and external financing of firms of different sizes in the main EMU member economies. The finding that smaller firms are more sensitive to tight monetary policy is confirmed by analysis of the determinants of their cost of capital. Further regression analysis (using a panel of balance sheet data) shows that the level of investment is highly dependent on the net sources of finance. Greater reliance on internal funds reduces investment for all sizes of firms, while long-term debt is more important for small and medium than large firms, but equity is more important for medium and large firms than for small. Cobham (2004) identified a shift in long-term debt financing towards large firms, but the results here suggest that the benefits of this are likely to be minimal while the costs in foregone investment could be substantial.

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Bibliographic Info

Paper provided by United Nations University, Institute for New Technologies in its series EIFC - Technology and Finance Working Papers with number 39.

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Date of creation: 2004
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Handle: RePEc:dgr:unutaf:eifc04-39

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Web page: http://www.intech.unu.edu

Related research

Keywords: Monetary Policy; Corporate Investment; Cost of Capital; EMU; Debt;

This paper has been announced in the following NEP Reports:

References

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  1. Willem Thorbecke & Lee Coppock, 1999. "Monetary Policy, Stock Returns, and the Role of Credit in the Transmission of Monetary Policy," Macroeconomics 9902006, EconWPA.
  2. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
  3. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  4. Anil K Kashyap & Jeremy C. Stein, 1994. "The Impact of Monetary Policy on Bank Balance Sheets," NBER Working Papers 4821, National Bureau of Economic Research, Inc.
  5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  6. Cobham, Alex, 2001. "EMU, Monetary Policy and the Role of Financial Constraints," EIFC - Technology and Finance Working Papers 6, United Nations University, Institute for New Technologies.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Corbett, Jenny & Jenkinson, Tim, 1997. "How Is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(0), pages 69-93, Supplemen.
  9. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-18.
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