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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)
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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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 listed on IDEAS
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.:
  1. 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. [Downloadable!] (restricted)
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  2. Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics," Working papers 544, Massachusetts Institute of Technology (MIT), Department of Economics.
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  3. 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. [Downloadable!] (restricted)
  4. Whited, Toni M., 1991. "Investment and financial asset accumulation," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 307-334, December. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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  6. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September. [Downloadable!] (restricted)
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  7. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series 114, Board of Governors of the Federal Reserve System (U.S.).
  9. Otto Eckstein & Allen Sinai, 1986. "The Mechanisms of the Business Cycle in the Postwar Era," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 39-122 National Bureau of Economic Research, Inc. [Downloadable!]
  10. Adrian Blundell-Wignall & Marianne Gizycki, 1992. "Credit Supply and Demand and the Australian Economy," RBA Research Discussion Papers rdp9208, Reserve Bank of Australia. [Downloadable!]
  11. 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. [Downloadable!] (restricted)
  12. Thierry A. Wizman, 1992. "What moves investment? Cash flows in a forward-looking model of capital expenditures," Research Paper 9201, Federal Reserve Bank of New York.
  13. Kohu, Ulrich & Ryan, Christopher J., 1987. "Investment and interest rates: An econometric dissection," Journal of Macroeconomics, Elsevier, vol. 9(3), pages 373-389. [Downloadable!] (restricted)
  14. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
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  16. Chris Ryan, . "Inflation and Corporate Taxation in Australia," RBA Research Discussion Papers rdp9011, Reserve Bank of Australia.
  17. Gertler, M.L. & Hubbard, R.G., 1988. "Financial Factors In Business Fluctuations," Papers fb-_88-37, Columbia - Graduate School of Business.
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  18. McKibbin, Warwick J & Siegloff, Eric S, 1988. "A Note on Aggregate Investment in Australia," The Economic Record, The Economic Society of Australia, vol. 64(186), pages 209-15, September.
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  19. 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. [Downloadable!] (restricted)
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  20. Nigel Dews & John Hawkins & Tracey Horton, 1992. "Measuring the Cost of Capital in Australia," RBA Research Discussion Papers rdp9205, Reserve Bank of Australia. [Downloadable!]
  21. 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. [Downloadable!] (restricted)
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  22. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Carolyn Currie, 2005. "Towards a General Theory of Financial Regulation: Predicting, Measuring and Preventing Financial Crises," Working Paper Series 142, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
    Other versions:
  2. Warren Tease & Jenny Wilkinson, 1993. "The Provision of Financial Services - Trends, Prospects and Implications," RBA Research Discussion Papers rdp9315, Reserve Bank of Australia. [Downloadable!]
  3. Karen Mills & Steven Morling & Warren Tease, 1994. "The Influence of Financial Factors on Corporate Investment," RBA Research Discussion Papers rdp9402, Reserve Bank of Australia. [Downloadable!]
  4. Malcolm Edey & Brian Gray, 1996. "The Evolving Structure of the Australian Financial System," RBA Research Discussion Papers rdp9605, Reserve Bank of Australia. [Downloadable!]
  5. Philip Lowe & Thomas Rohling, 1993. "Agency Costs, Balance Sheets and the Business Cycle," RBA Research Discussion Papers rdp9311, Reserve Bank of Australia. [Downloadable!]
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