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Corporate Balance Sheet Restructuring and Investment in the Euro Area

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  • Albert Jaeger
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    Abstract

    The recent boom-bust cycle in the euro area''s equity valuations has left nonfinancial corporations saddled with a legacy of high debt or leverage. Models of corporate investment behavior based on imperfect capital markets predict that highly leveraged balance sheets can act as a brake on investment spending. The paper''s empirical analysis suggests that leverage effects on corporate investment can be substantial and persistent, particularly if leverage exceeds threshold values.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16536
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/117.

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    Length: 24
    Date of creation: 01 Jun 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/117

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    Related research

    Keywords: External financing; Forecasting models; capital stock; financial assets; cost of capital; stock market; capital markets; financial structure; capital ratio; capital spending; financial corporations; capital market; capital structure; equity ratio; equity financing; equity valuation; capital goods; imperfect capital markets; capital budgeting; valuation of capital; international capital; moral hazard; financial structures; stock prices; equity investments; capital market imperfections; cash flow; hedges; financial sector; financial intermediation; hedge; stock markets; inflation rate; equity risk premium; bear markets; equity market; equity markets; portfolio investment; stock market bubble; financial market;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Andrew Benito & Garry Young, 2002. "Financial pressure and balance sheet adjustment by UK firms," Bank of England working papers 168, Bank of England.
    2. Vermeulen, Philip, 2000. "Business fixed investment: evidence of a financial accelerator in Europe," Working Paper Series 0037, European Central Bank.
    3. Blanchard, O. & Rhee, C. & Summers, L., 1990. "The Stock Market, Profit And Investment," RCER Working Papers 233, University of Rochester - Center for Economic Research (RCER).
    4. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
    5. John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 8-23.
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    Cited by:
    1. Saibal Ghosh, 2005. "Does leverage influence banks' non-performing loans? Evidence from India," Applied Economics Letters, Taylor & Francis Journals, vol. 12(15), pages 913-918.
    2. Albert Jaeger & Ludger Schuknecht, 2007. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(6), pages 45-66, November.
    3. Marie Diron & Maria Cruz Manzano & Thomas Westermann, 2005. "Forecasting aggregate investment in the euro area: do indicators of financial conditions help?," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 206-27 Bank for International Settlements.
    4. Denise Côté & Christopher Graham, 2007. "Corporate Balance Sheets in Developed Economies: Implications for Investment," Working Papers 07-24, Bank of Canada.

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