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Asset Substitution and Capital Use by Firms Facing Financial Repression

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  • Paul Natke

Abstract

Firm behavior is examined during a period of financial repression in Brazil. Empirical findings indicate that firms experiencing rising inflation rates: (1) increase their capital stock while reducing liquid asset holdings; (2) experience increases in the productivity of capital (i.e. a rise in the output-capital ratio); (3) increase the scale of the firm's operations both because of the rising capital productivity and the greater quantity of capital; (4) most firms increase liquid asset holdings as they expand production, although Brazilian firms do so at about twice the rate of multinational firms; (5) do not change overall inventory holdings; however, inventories increase as output rises for multinational firms while for Brazilian firms inventories decrease as output rises; and (6) firms that are more likely to face financial constraints expand their scale of operations at a faster rate as they accumulate more debt.

Suggested Citation

  • Paul Natke, 2008. "Asset Substitution and Capital Use by Firms Facing Financial Repression," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(1), pages 129-145.
  • Handle: RePEc:taf:ijecbs:v:15:y:2008:i:1:p:129-145
    DOI: 10.1080/13571510701830564
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