Corporate Investment and Financial Crisis: Can Under- and Overinvestment Be Mitigated by Banks in an Emerging Market?

This study explores the question whether the problems of under- and overinvestment can be mitigated by banks. Using a unique matched dataset of Ukrainian companies and their main banks we apply robust IV-GMM-system, dynamic GMM-system techniques, and treatment effect model to estimate the role of banks incorporate investment. The available evidence shows that companies raise the use of bank loans in favorable times to accumulate working capital and spend it in the time of tight constraints. Ukrainian banks do lessen financial constraints spurring fi rms to invest more in the case of underinvestment. Banks also are able to restrain the companies from overinvestment but this impact depends signi cantly on the bank fi nancial health. Our fi ndings demonstrate that certain banks financed excessive corporate investment in pre-crisis period but this practice shrinks down with the onset of the crisis.