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Financial constraints for investment in Brazil

Financial constraints for investment in Brazil Purpose – The purpose of this paper is to verify the existence of financial constraints for investment in Brazil, an emerging market with growing international visibility. Design/methodology/approach – Using panel data methodology and generalized method of moments (GMM), the paper estimates dynamic investment models based on the Euler equation and Tobin's q for a panel data set of 199 Brazilian non‐financial firms for the time period 1995‐2006. Findings – Results show that Brazilian firms face financial constraints since their investments depend on internally generated funds. Results are robust to different investment models based on the Euler equation, also controlling for growth opportunities. Significant investment‐cash flow sensitivity has been found for the whole sample of firms. Subsamples of firms considered as under financial constraints, according to dividend payout and equity issuance policies, have higher investment‐cash flow sensitivity. Investment‐cash flow sensitivity of financially constrained firms in Brazil is higher than that in the UK and in Romania, a transition economy. Originality/value – The results extend empirical evidence of financial constraints in Brazil. The paper contributes to the literature by assessing the firms’ financial constraint status on an annual basis, and by using panel data methodology and GMM to estimate dynamic models of investment that take into account the proposals of the hierarchy of finance theory. In addition, the paper controls for growth opportunities. Capital market imperfections affect firm investment in Brazil and such effects are even stronger for financially constrained firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

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Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
1743-9132
DOI
10.1108/IJMF-11-2012-0121
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to verify the existence of financial constraints for investment in Brazil, an emerging market with growing international visibility. Design/methodology/approach – Using panel data methodology and generalized method of moments (GMM), the paper estimates dynamic investment models based on the Euler equation and Tobin's q for a panel data set of 199 Brazilian non‐financial firms for the time period 1995‐2006. Findings – Results show that Brazilian firms face financial constraints since their investments depend on internally generated funds. Results are robust to different investment models based on the Euler equation, also controlling for growth opportunities. Significant investment‐cash flow sensitivity has been found for the whole sample of firms. Subsamples of firms considered as under financial constraints, according to dividend payout and equity issuance policies, have higher investment‐cash flow sensitivity. Investment‐cash flow sensitivity of financially constrained firms in Brazil is higher than that in the UK and in Romania, a transition economy. Originality/value – The results extend empirical evidence of financial constraints in Brazil. The paper contributes to the literature by assessing the firms’ financial constraint status on an annual basis, and by using panel data methodology and GMM to estimate dynamic models of investment that take into account the proposals of the hierarchy of finance theory. In addition, the paper controls for growth opportunities. Capital market imperfections affect firm investment in Brazil and such effects are even stronger for financially constrained firms.

Journal

International Journal of Managerial FinanceEmerald Publishing

Published: Jan 28, 2014

Keywords: Investment; Brazil; Cash flow; Emerging market; Financial constraints

References

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