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Firms’ investments during two crises

Author

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  • Antonio De Socio

    (Bank of Italy)

  • Enrico Sette

    (Bank of Italy)

Abstract

We study the drivers of investment in Italy during the global financial crisis and the sovereign debt crisis. We focus on the effect of leverage while controlling for the role of other drivers: expected demand, profitability, access to credit and uncertainty. As firm-level leverage may be correlated with its unobservable characteristics, we employ instrumental variables estimation, using the median leverage of firms in the same industry and size decile as an instrument. We find that an increase in leverage equal to the interquartile range (about 30 percentage points) is associated with a lower investment rate of 1.9 and 1.4 percentage points (36 and 41 per cent of its mean) during each crisis. We also find that expected demand growth has a strong positive association with investments, whereas this relation holds for profitability only during the sovereign debt crisis. In contrast, credit rationing and uncertainty have a negative, although more limited, effect. Overall, ex-ante high firm indebtedness has been an important driver of the lower investment rate over the last decade.

Suggested Citation

  • Antonio De Socio & Enrico Sette, 2018. "Firms’ investments during two crises," Temi di discussione (Economic working papers) 1173, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1173_18
    as

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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Drivers of the investment cycle
      by Bruno Duarte in EUnomics on 2018-09-06 22:04:53

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    Cited by:

    1. Juan Carluccio & Clément Mazet-Sonilhac & Jean-Stéphane Mésonnier, 2019. "Investment and the WACC: new micro evidence for France," Working papers 710, Banque de France.

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    More about this item

    Keywords

    investment; leverage; crisis;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G01 - Financial Economics - - General - - - Financial Crises

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