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Balance Sheet Restructuring and Investment

Author

Listed:
  • 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.

Suggested Citation

  • Karen Mills & Steve Morling & Warren Tease, 1993. "Balance Sheet Restructuring and Investment," RBA Research Discussion Papers rdp9308, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9308
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    File URL: http://www.rba.gov.au/publications/rdp/1993/pdf/rdp9308.pdf
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    References listed on IDEAS

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    Cited by:

    1. Warren Tease & Jenny Wilkinson, 1993. "The Provision of Financial Services – Trends, Prospects and Implications," RBA Research Discussion Papers rdp9315, 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. 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.
    4. Karen Mills & Steven Morling & Warren Tease, 1994. "The Influence of Financial Factors on Corporate Investment," RBA Research Discussion Papers rdp9402, Reserve Bank of Australia.
    5. Malcolm Edey & Brian Gray, 1996. "The Evolving Structure of the Australian Financial System," RBA Research Discussion Papers rdp9605, Reserve Bank of Australia.

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