Euro Area Policies: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
08 Jul 2016
eISBN:
9781498353694
Language:
English
Keywords:
ISCR; CR; euro; rate; sales growth; leveraged firm; investment response; firm size; indebted firm; Corporate investment; Small and medium enterprises; Financial statements; Debt burden; Corporate finance; Global; net investment ratio
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Euro Area Policies: Selected Issues

Abstract

Euro Area Policies: Selected Issues

Investment, Firm Size, and the Corporate Debt Burden: a Firm-Level Analysis of the Euro Area1

Corporate investment in the euro area fell markedly with the crisis and has remained weak. Drawing upon a large, cross-country panel dataset of firms’ balance sheets and income statements, we investigate the microeconomic drivers of firms’ investment choices, finding a negative relationship between a firm’s debt and investment. This negative effect is greater for small and medium enterprises (SMEs) than large firms. Highly indebted firms are also found to be less responsive to demand. The results suggest that the weak euro area investment recovery may be partly due to corporate debt burdens, particularly at SMEs, which account for a large share of value-added in the euro area.

A. Introduction

1. Corporate investment in the euro area fell with the crisis and has remained relatively flat during the subsequent weak recovery. As shown in Figure 1, panel 1, gross real investment as a share of GDP by non-financial corporations (NFCs) in the euro area slumped almost 15 percent during the global financial crisis, equal to over 2 percentage points of GDP. For selected euro area countries (Greece, Ireland, Italy, Portugal, and Spain), the fall was even more dramatic, with corporate investment dropping about 20 percent.2 Post-crisis, corporate investment has failed to recover, remaining at this depressed level. By contrast, even though the U.S. had a more severe corporate investment collapse than the euro area, corporate investment in the U.S. recovered much faster, close to levels seen pre-crisis. As a share of GDP, euro area gross corporate investment has historically been above that of the U.S. and below that of Japan.

Figure 1.
Figure 1.

Corporate Investment and Debt

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

2. Small and medium enterprises (SMEs) account for over half of gross corporate investment in the euro area in recent years, with more highly indebted firms contributing most of this share (Figure 1, panel 2). The drop in 2009 investment appears to be largely driven by a severe fall in investment by SMEs (Figure 1, panel 3). These findings suggest that SMEs, and likely those with higher leverage, may have an important role in explaining investment dynamics in the euro area.

3. Overall corporate leverage has remained high for SMEs (Figure 1, panel 4). Debt growth slowed significantly after the crisis but did not result in significant deleveraging as the lower debt accumulation was partially offset by declining asset values (Figure 1, panel 5). The pattern is similar for large firms but less pronounced (Figure 1, panel 6).

4. Corporate financing in the euro area relies more on loans, possibly reflecting the region’s high share of SMEs in value-added (see text figure, panels 1 and 2). SMEs account for over 65 percent of value-added in the euro area. Through relationship-based lending, banks are better able than credit and capital markets to overcome the asymmetric information problems related to SME lending (Berger and Udell, 1998). In the U.S., small businesses account for around half of GDP, less than in the euro area (Kobe, 2012), and perhaps relatedly, debt securities play a larger role in corporate financing.

A02ufig1

Euro Area: Contribution to Debt Financing Growth of Non-Financial Corporations

(Percent)

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Source: ECB.
A02ufig2

United States: Contribution to Debt Financing Growth of Non-financial Corporations

(Percent)

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Source: Board of Governors of the Federal Reserve System.

5. Corporate indebtedness varies significantly across the euro area. Debt as a share of corporate financial assets (different from total assets) tends to be higher in selected economies than in the core (see text figure, panels 1 and 2).

A02ufig3

Financial Leverage of Non-Financial Corporations

(Debt over financial assets, in percent)

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Selected euro area includes: Greece, Ireland, Italy, Portugal, and Spain. Source: OECD stat. and IMF staff calculations.
A02ufig4

Corporate Debt-to-Financial Assets Ratio

(In Percent)

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Source: OECD and IMF staff calculations.

6. Strained corporate balance sheets may reduce firms’ ability and willingness to invest. Many earlier studies show a negative relationship between leverage and firm growth, typically measured as either investment or employment growth (Myers, 1977; Lang and others, 1996; Aivazian and others, 2005; Kalemli-Ozcan and others, 2015). In these studies, higher leverage is argued to reduce investment by constraining a firm’s ability to obtain external financing for new investments and/or incentivizing firms’ shareholders to decide against new investments, as a larger share of the gains will necessarily accrue to debtholders than if leverage were lower.

7. Similarly, leverage may also dampen the sensitivity of a firm’s investment to demand. Firm size can also mediate the negative effect of leverage, as smaller firms tend to be more dependent on bank financing and have lower spare capacities and a lower ability to access alternative financing options, such as issuing debt or equity securities (Kashyap, Lamont, and Stein, 1994; Lang and others, 1996; Kalemli-Ozcan and others, 2015). These arguments suggest that firm size, leverage, and demand may interact to affect investment. They also suggest that these effects could be more pronounced in the euro area, as it is characterized by a dominant share of SMEs and high reliance on bank financing.

8. Using a large sample of firms in the euro area over 2001–2013, we estimate the responsiveness of real investment to firm size, leverage, and demand. Taken from a newly assembled and cleaned dataset of firm balance sheets and income statements, the sample contains over six million observations, covering about one and a half million firms in eight euro area countries (Austria, Belgium, Germany, France, Italy, Finland, Spain, and Portugal). The baseline model controls for firm-specific and sector-country-time fixed effects and selected firm characteristics. The results indicate that:

  • A 10 percentage point rise in a large firm’s leverage is associated with a 3 percentage point fall in the investment-to-capital ratio (physical capital growth) on average.

  • For SME, a 10 percentage point rise in leverage would lower investment by about −3.5 percentage points, about 20 percent larger in magnitude than that for a large firm.

  • A 10 percentage point rise in a firm’s real sales growth (demand) is associated with a 5 percentage point rise in the investment-to-capital ratio of a large firm on average. This effect is smaller by about half for SMEs. Leverage reduces the effect of demand on investment—for an SME, moving from the 10th percentile of leverage to the 90th percentile, investment falls by about 0.5 percentage points, to 2 percentage points.

9. The findings broadly hold across countries and before and after the crisis, although the magnitudes of the effects changes. We undertake a variety of checks: allowance for differential effects of positive versus negative sales growth; allowance for differential effects pre- versus post-crisis; and allowance for differential effects across countries. Overall, the negative effects of leverage on the investment-to-capital ratio hold up, as do the exacerbating effects of SME size and the attenuating effect of leverage on the investment response to demand. However, there are differences in the magnitudes of these effects across countries and over time. These effects have increased post-crisis. The negative effects of leverage are particularly strong in Spain and Italy.

10. The results suggest that policies to reduce high levels of firm leverage post-crisis and boost the size of firms may help spur corporate investment and enhance the transmission of monetary and fiscal policies. Lower leverage may bolster firms’ efforts to undertake new, productive investments by alleviating the financing constraints and providing stronger investment incentives to controlling shareholders. Moreover, the findings suggest that firms with lower leverage raise their investment more in response to higher demand (proxied by real sales growth), which may support accommodative monetary and fiscal policies to the extent that the policies boost firm sales. In other words, aggregate demand policies may transmit better when firms’ leverage is lower. High levels of non-performing loans in the euro area (some of which are corporate debt) have also been argued to hamper the transmission of monetary policy by weakening banks’ profitability and reducing their propensity to lend (see Aiyar and others, 2015). Finally, larger firms appear to be more responsive to demand, which implies that a shift towards larger firms in the size distribution could boost responsiveness.

11. The paper proceeds as follows. In the second section, we briefly present the sample and describe the underlying data. We then describe the empirical research design and econometric model used in the third section. In the fourth section, we outline the baseline results and some extensions. The fifth section summarizes the findings and concludes with some remarks on possible policy implications and directions for future research.

B. Data Description and Summary Statistics

12. Firm-level balance sheets and income statements come from the Orbis database compiled by Bureau van Dijk Electronic Publishing.3 The database includes information harvested from census and regulatory filings in a number of countries for both listed and unlisted firms; it covers all sectors of the economy and all sizes of firms. It includes several million firms and observations at an annual frequency. We use a version of the database processed and cleaned by the Duval and others (2016), which converted the data to local currency and transformed the nominal variables into real values using sector-specific deflators.4 The extract we focus on includes eight euro area countries for which data is available (Austria, Belgium, Finland, France, Germany, Italy, Portugal, and Spain) from 2001-2013. The sample includes non-financial, private firms that are not engaged in mining or other resource extraction activities. We collapse down the sectoral identifiers to the 2-digit industry level, following the NACE Revision 2 classification. When aggregating up to the country or regional level, we reweight the observations by country-sector-size class to match the population, as tabulated by Eurostat (see OECD, 2013 for a detailed explanation of the resampling procedure).

13. The dataset exhibits a wide degree of variability, in variables and across countries and sectors. The firm-level variables that we use include: net investment-to-capital ratio, debt-to-assets ratio, SME indicator (equals one if less than 250 employees), real sales growth, long-term debt-to-assets ratio, and the natural logarithm of total assets. The net investment ratio is computed as the annual change in the real capital stock divided by the lagged capital stock. Leverage is the ratio of debt and loans divided by total assets. Real sales growth is the annual percentage change in real operating revenue (turnover). Finally, the long-term debt ratio is measured as the ratio of long-term debt to total debt. As shown in Table 1, there is a large degree of variability in these variables across the dataset, which contains over a million observations. The sample however is heavily skewed towards SMEs (defined as non-financial corporations with a number of employees between 0 and 249). Table 2 shows a cross-tabulation of the sample by country and sector. Manufacturing and wholesale, retail, and accommodation sectors are highly represented in the sample, followed by the construction and the professional service sectors.

Table 1.

Descriptive statistics

article image
Note: “sd” denotes the standard deviation. The dataset is further cleaned to reduce the impact of extreme observations. Following Cleary (1999) and Aivazian and others (2005), some variables are winsorized: Set the net investment-to-capital ratio to 200 (-200) if it is greater (less) than 200 percent (-200 percent). Set real sales growth to 100 percent (-100 percent) if it is greater (less) than 100 percent (-100 percent). Set the debt-to-assets ratio (leverage) or long-term debt-to-assets ratio to 100 percent (0 percent) if it is greater (less) than 100 percent (0 percent). The SMEs indicator equals one if the number of employees is less than 250 employees and 0 otherwise. The sample includes 8 euro area countries: Austria, Belgium, Germany, France, Finland, Italy, Spain, and Portugal. The time dimension is 2001-2013.Source: Orbis database and IMF staff calculations.
Table 2.

Sample slice by country and sector

article image
Source: Orbis database and IMF staff calculations.

14. SMEs generate a large share of value-added in the euro area (Figure 2, panel 1). In sectors such as construction and many service sectors, they account for well over half of sectoral value-added (Figure 2, panel 2). From the cleaned Orbis data, we can see that leverage rose with the crisis for the typical firm (median firm), but most dramatically for the median SMEs (Figure 2, panel 3). Similarly, investment fell for the typical firm, but most sharply for SMEs (Figure 2, panel 4), providing some empirical motivation for investigating how firm size may affect the relationship between investment and leverage.

Figure 2.
Figure 2.

Firm Size and Performance in the Euro Area

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

C. Research Design and Econometric Model

15. The baseline model expands upon the specifications from the previous literature on firm leverage and investment, by including interactions with size and sales growth. As in Lang and others (1996), Aivazian and others (2005), and Kalemli-Ozcan and others (2015), we estimate a single equation, linear regression model that relates the investment-to-capital ratio to a variety of drivers. It is an augmented version of a traditional accelerator model of investment, where the investment-to-capital ratio is driven by demand changes (sales growth) and additional variables (see Oliner and others, 1995, for a discussion of various investment models). Firm size and leverage are the key additional variables included. They could be viewed as proxies for a firm’s financing costs, while also possibly affecting a firm’s governance. The baseline panel model specification is as follows:

(Iisc,tKisc,t−1)=β1(DEBTASSETS)isc,t−1+β2(SALESGRO)isc,t+β3(SIZE)isc,t+γ1(DEBTASSETS)isc,t−1⋅(SALESGRO)isc,t+γ2(DEBTASSETS)isc,t⋅(SIZE)isc,t+γ3(SALESGRO)isc,t⋅(SIZE)isc,t+δ(DEBTASSETS)isc,t−1⋅(SALESGRO)isc,t⋅(SIZE)isc,t+Xisc,t−1′Θ+αi+αsc,t+ɛisc,t(1)

Here, I is the firm’s net investment, K its tangible, fixed assets, DEBT its total debt, ASSETS its total assets, SALESGRO its real sales growth, and SIZE the SME indicator. All ratios and growth rates are expressed in percentage points. The vector X includes two control variables—the share of long-term debt in debt (following Aivazian and others, 2005) and the natural log of total assets (following Kalemli-Ozcan and others, 2015). i indexes firms and t indexes years. Each firm is a member of a particular sector s and country c. αi denotes the set of firm-specific effects which capture time-invariant unobservable factors at the firm level, while αsc, t denotes the set of sector-country-year-specific fixed effects that capture common shocks to firms belonging to the same sector in a country in a given year. The latter set of fixed effects helps control for aggregate sectoral demand or policy-induced shocks, as well cross-sectional dependence between firms.

16. By including a variety of interaction terms, the model allows for a rich set of hypotheses with respect to the relationship between firm-level investment and leverage. In particular, the marginal effects of leverage and sales growth are given by:

∂(Iisc,tKisc,t−1)∂(DEBTASSETS)isc,t−1=β1+γ1(SALESGRO)isc,t+γ2(SIZE)isc,t+δ(SALESGRO)isc,t⋅(SIZE)isc,t

And

∂(Iisc,tKisc,t−1)∂(SALESGRO)isc,t−1=β2+γ1(DEBTASSETS)isc,t−1+γ2(SIZE)isc,t+δ(DEBTASSETS)isc,t−1⋅(SIZE)isc,t

Here, the direct effect of the variable is given by the β coefficients, while the indirect effects that are mediated by the levels of other variables are captured by the γ and δ coefficients, with the γ indicative of the two-way interaction and δ of the three-way interaction. This specification makes explicit that the effect of leverage on investment depends on its direct effect, as well as the level of firm-specific demand (real sales growth) and the firm’s size. Similarly, the effect of firm-specific demand (real sales growth) on investment depends on its direct effect, as well as the level of firm’s leverage and the firm’s size. The specification further allows for the possibility that a firm’s size may affect these indirect effects (through the three-way interaction in the model). The baseline estimates pool across firms, sectors, countries, and time. Unpacking the estimates, we also look at how they vary by country and differ before versus after the crisis.

D. Empirical Results

17. The results show that higher leverage is associated with lower investment ratios, and that this effect is greater for SMEs than large firms. Figure 3 below shows the predicted effect of leverage on investment, conditional on firm size, overlaid on the sample distribution of leverage (full model results are presented in Table A1 at the back, with the underlying coefficients statistically significant). For a large firm, physical capital growth (net investment) is under 3 percentage points lower for a 10 percentage point rise in leverage. For an SME, the estimated reduction is about 3.5 percentage points, about 25 percent larger. The findings that pre-existing leverage has a negative effect on investment and that it is stronger for smaller firms are consistent with the previous empirical literature (such as Kalemi-Ozcan and others, 2015, and Lang and others, 1996).

Figure 3.
Figure 3.

Predicted Effect of Leverage

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Note: Lines show the predicted effect on firm investment given the indicated value of leverage, with real sales growth at its mean. Bars show histogram of leverage, with percent of sample shown on right axis. Real Investment Ratio Change is in percentage points.

18. Demand (real sales growth) is associated with higher investment-to-capital, but this effect is weaker for SMEs than large firms and for more highly indebted firms. As described in the introduction, smaller firms and those with higher leverage are likely more financially constrained. Smaller firms may have recourse only to banks for financing, while higher leveraged firms might be seen as riskier or less able to take on greater debt to invest. Consequently, SMEs and higher leveraged firms could be expected to be less able to find the financing to enable them to invest more in response to demand. Figure 4 below shows the predicted effect, overlaid on the sample distribution of real sales growth. The distribution is roughly symmetric and centered at a slightly positive sales growth, but with somewhat fatter tails than a normal distribution. A 10 percentage point rise in sales is associated with a 5 percentage point increase in the real investment ratio for a large firm, while for an SME, it is about half that, at 2.5 percentage points.

Figure 4.
Figure 4.

Predicted Effect of Real Sales Growth

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Note: Lines show the predicted effect on firm investment given the indicated value of real sales growth, with leverage at its mean. Bars show histogram of sales growth, with percent of sample shown on right axis. Real Investment Ratio Change is in percentage points.

19. Higher leverage is associated with a lower investment response to demand. Figure 5 shows how the marginal effect of sales growth by firm size depends on the firm’s leverage—leverage weakens the firm’s investment response to demand. Going from the 10th percentile to the 90th percentile of firm leverage (from about 5 percent to 40 percent leverage) is associated with about a further 0.5 percentage points lower investment response to a 10 percentage point rise in sales growth. Both of these findings are consistent with the financial constraints hypothesis; it appears that smaller and more highly leveraged firms are less able to respond to demand shocks. However, the effect of firm size is by far the greater one.

Figure 5.
Figure 5.

Marginal Effect of Real Sales Growth

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Note: Lines show the marginal effect of one percentage point change in real sales growth on firm investment given the indicated value of leverage and whether or not the firm is an SME. Bars show histogram of leverage, with percent of sample shown on right axis. Real Investment Ratio Change is in percentage points.

20. Splitting the sample into pre- and post-crisis, the results indicate that firms’ investment sensitivities to leverage and demand have declined since the crisis. The pre-crisis sample spans 2001-2007, while post-crisis covers the remainder (2008-2013). The text figure illustrates how the average marginal effect of demand dropped dramatically post-crisis, falling to about three-quarters of the pre-crisis value (see Tables A2 and A3 for the full results). Leverage reduces this sensitivity further. This is consistent with a structural break in the investment response to demand since the crisis. What underlies this shift is unclear. It could reflect an underlying interaction of investment sensitivity to the broader macroeconomic environment (that is, upturn or downturn).

A02ufig5

Euro Area: Firm level Investment Sensitivity to Positive Demand Shocks

(Investment increase in response to 10pp increase in real sales growth)

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

Note: Estimates are based on a non-linear fixed-effects panel regression fitting the firm-level investment-to-capital ratio on leverage, sales, SME dummy, leverage interacted with firm-size class, sales growth interacted with leverage, sales growth interacted with firm size, and a triple interaction of leverage, SME dummy, and sales growth. Themodel also controls for long-term debt, the long of total assets, sector*country*time effects and firm-fixed effects. The sample is composed of Austria, Belgium, Germany, France, Finland, Italy, Portugal and Spain. The time dimension is 2000 to 2013. Firm level data are from Orbis, BvD Publishing.Source: IMF staff estimates.

21. Country-by-country estimates of the investment effects of firm size and leverage suggest that the broad patterns from the panel estimates tend to hold but that the magnitudes of the effects differ across countries. We estimate the model country-by-country to investigate possible heterogeneity. This will account for the fact that the interactions between size, demand, and indebtedness at the firm could affect investment differently across countries due to country differences in regulations, firms’ ability to access financing, and other characteristics. As Table A4 shows, there is considerable heterogeneity across countries. The debt overhang effect is particularly strong in Austria, Finland, France, and Spain. Interestingly, these countries share in common a significant leverage differential between SMEs and large firms compared with others (Figure 6). This is consistent with the previous finding that the marginal effect of leverage was significantly higher for SMEs where credit constraints and debt overhang were the most binding.

Figure 6.
Figure 6.

Country-Specific Estimates

Citation: IMF Staff Country Reports 2016, 220; 10.5089/9781498353694.002.A002

E. Conclusion

22. Corporate investment in the euro area fell with the crisis and has failed to bounce back. In this paper, we try to unpack this fact by undertaking a firm-level analysis of investment in the euro area using a large, cross-country, cleaned dataset of euro area firms from 2001–2013. The results suggest that the euro area’s preponderance of smaller firms, which are more reliant on bank-based financing, explains some of the weakness of investment post-crisis. Similar to their share of the euro area economy’s value-added, SMEs have accounted for almost 60 percent of gross corporate investment since 2010. Compared to large firms, SMEs tend to exhibit a smaller sensitivity of investment to demand and a larger, negative sensitivity of investment to leverage. The broad findings hold across a number of countries, although the size of the estimated effects differs by country. The analysis also indicates that firms’ investment sensitivity has shrunk post-crisis—firms appear less responsive in general.

23. Taking the stylized facts and analysis together, the results suggest that policies to boost the size of firms, reduce firm leverage, and develop alternatives to bank-based financing could stimulate investment and enhance the transmission of monetary and fiscal policies. These would not be quick fixes, requiring changes in structural policies to encourage the growth of firms, enable speedier restructuring of corporate balance sheets where leverage is high, and expand corporate financing options for SMEs. However, with larger firms and lower leverage, corporate investment should be more responsive to demand, which may translate into a greater sensitivity to accommodative monetary and fiscal policies, generating a positive feedback to investment.

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Appendix I. Additional Results Tables

Table A1.

Effects of firm leverage on firm investment ratio. OLS with fixed effects. Full sample.

article image
Note: The sample excludes firms from the resource extraction sectors, financial and public administration sectors in the Orbis database. The sample spans the years 2003-2013 and includes 8 euro area countries (Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain). Firm investment is measured by the annual increase in real capital stock over lagged real capital stock. Leverage is measured as the ratio of total debt to total assets. Debt maturity is measured as the percentage of long-term debt in total debt. To avoid the effect of outliers, we winsorized the observations following Cleary (1999). The cutoff values are 200 and -200 for investment/net fixed asset, 100 and -100 for real sales growth, 100 and 0 for debt maturity, and 100 and 0 for leverage.Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1
Table A2.

Effects of firm leverage on firm investment ratio. OLS with fixed effects. Pre-crisis sample

article image
Note: The sample excludes firms from the resource extraction sectors, financial and public administration sectors in the Orbis database. The sample spans the years 2003-2007 and includes 8 euro area countries (Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain). Firm investment is measured by the annual increase in real capital stock over lagged real capital stock. Leverage is measured as the ratio of total debt to total assets. Debt maturity is measured as the percentage of long-term debt in total debt. To avoid the effect of outliers, we winsorized the observations following Cleary (1999). The cutoff values are 200 and -200 for investment/net fixed asset, 100 and -100 for real sales growth, 100 and 0 for debt maturity, and 100 and 0 for leverage.Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1
Table A3.

Effects of firm leverage on firm investment ratio. OLS with fixed effects. Post-crisis sample

article image
Note: The sample excludes firms from the resource extraction sectors, financial and public administration sectors in the Orbis database. The sample spans the years 2008-2013 and includes 8 euro area countries (Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain). Firm investment is measured by the annual increase in real capital stock over lagged real capital stock. Leverage is measured as the ratio of total debt to total assets. Debt maturity is measured as the percentage of long-term debt in total debt. To avoid the effect of outliers, we winsorized the observations following Cleary (1999). The cutoff values are 200 and -200 for investment/net fixed asset, 100 and -100 for real sales growth, 100 and 0 for debt maturity, and 100 and 0 for leverage.Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.
Table A4.

Country-specific estimations: 2001–2013

article image
Note: The sample excludes firms from the resource extraction sectors, financial and public administration sectors in the Orbis database. The sample spans the years 2003-2013 and includes 8 euro area countries (Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain). Firm investment is measured by the annual increase in real capital stock over lagged real capital stock. Leverage is measured as the ratio of total debt to total assets. Debt maturity is measured as the percentage of long-term debt in total debt. To avoid the effect of outliers, we winsorized the observations following Cleary (1999). The cutoff values are 200 and -200 for investment/net fixed asset, 100 and -100 for real sales growth, 100 and 0 for debt maturity, and 100 and 0 for leverage.Robust standard-error below the coefficients. *** p<0.01, ** p<0.05, * p<0.1.

1

Prepared by John Bluedorn and Christian Ebeke (all EUR). We would like to thank Alexander Hijzen and Romain Duval for kindly sharing their cleaned version of the firm-level Orbis database. Xiaobo Shao and Jesse Siminitz provided outstanding research assistance. We thank staff from the European Commission and European Investment Bank for their helpful comments and feedback.

2

Henceforth, we use the term “corporate investment” to refer to investment by non-financial corporations.

3

Orbis includes firm-level data from around 100 countries worldwide, covering both developed and emerging market economies.

4

The deflators are country-industry purchasing power parity indices taken from the OECD’s Structural Analysis (STAN) database. The cleaned database includes information from three vintages, keyed according to the Orbis unique firm identifier. Firms are kept if they have nonmissing values, positive revenue, at least three employees, and at least three consecutive observations.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Euro Area Policies: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2016: Issue 220
Publisher:
International Monetary Fund
ISBN:
9781498353694
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781498353694.002

Corporate Investment and Debt

Euro Area: Contribution to Debt Financing Growth of Non-Financial Corporations

(Percent)

United States: Contribution to Debt Financing Growth of Non-financial Corporations

(Percent)

Financial Leverage of Non-Financial Corporations

(Debt over financial assets, in percent)

Corporate Debt-to-Financial Assets Ratio

(In Percent)

Firm Size and Performance in the Euro Area

Predicted Effect of Leverage

Predicted Effect of Real Sales Growth

Marginal Effect of Real Sales Growth

Euro Area: Firm level Investment Sensitivity to Positive Demand Shocks

(Investment increase in response to 10pp increase in real sales growth)

Country-Specific Estimates