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Balance Sheet Restructuring and Investment

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Author Info

  • Karen Mills

    (Reserve Bank of Australia)

  • Steve Morling

    (Reserve Bank of Australia)

  • Warren Tease

    (Reserve Bank of Australia)

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    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.

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    File URL: http://www.rba.gov.au/publications/rdp/1993/pdf/rdp9308.pdf
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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9308.

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    Date of creation: Jun 1993
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    Handle: RePEc:rba:rbardp:rdp9308

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    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. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
    2. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
    3. Kohu, Ulrich & Ryan, Christopher J., 1987. "Investment and interest rates: An econometric dissection," Journal of Macroeconomics, Elsevier, vol. 9(3), pages 373-389.
    4. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
    5. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
    6. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1991. "Speculative Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 529-46, May.
    7. Fazzari, Steven M & Athey, Michael J, 1987. "Asymmetric Information, Financing Constraints, and Investment," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 481-87, August.
    8. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
    9. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
    10. Amihud, Yakov & Lev, Baruch & Travlos, Nickolaos G, 1990. " Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions," Journal of Finance, American Finance Association, vol. 45(2), pages 603-16, June.
    11. Philip Lowe & Geoffrey Shuetrim, 1992. "The Evolution of Corporate Financial Structure: 1973–1990," RBA Research Discussion Papers rdp9216, Reserve Bank of Australia.
    12. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    13. Ben Bernanke & Mark Gertler, 1986. "Agency costs, collateral, and business fluctuations," Proceedings, Federal Reserve Bank of San Francisco.
    14. Michael Devereux & Fabio Schiantarelli, 1989. "Investment, Finacial Factors and Cash Flow: Evidence From UK Panel Data," NBER Working Papers 3116, National Bureau of Economic Research, Inc.
    15. Whited, Toni M., 1991. "Investment and financial asset accumulation," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 307-334, December.
    16. D. E. Allen, 1991. "The Determinants of the Capital Structure of Listed Australian Companies: The Financial Manager's Perspective," Australian Journal of Management, Australian School of Business, vol. 16(2), pages 103-128, December.
    17. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    18. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    19. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    20. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
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    Cited by:
    1. Karen Mills & Steven Morling & Warren Tease, 1994. "The Influence of Financial Factors on Corporate Investment," RBA Research Discussion Papers rdp9402, Reserve Bank of Australia.
    2. Philip Lowe & Thomas Rohling, 1993. "Agency Costs, Balance Sheets and the Business Cycle," RBA Research Discussion Papers rdp9311, Reserve Bank of Australia.
    3. Malcolm Edey & Brian Gray, 1996. "The Evolving Structure of the Australian Financial System," RBA Research Discussion Papers rdp9605, Reserve Bank of Australia.
    4. Malcom Edey & Brian Gray, 1996. "The Evolving Structure of the Australian Financial System," RBA Annual Conference Volume, in: Malcom Edey (ed.), The Future of the Financial System Reserve Bank of Australia.
    5. Warren Tease & Jenny Wilkinson, 1993. "The Provision of Financial Services – Trends, Prospects and Implications," RBA Research Discussion Papers rdp9315, Reserve Bank of Australia.

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