Appendix I. Data, Results, and Robustness
Driscoll, John and Aart Kraay, 1998, “Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data,” The Review of Economics of Economics and Statistics, Vol. 80(4), pp. 549–60.
Eberly, Janice, Sergio Rebelo, and Nicolas Vincent, 2012, “What Explains the Lagged-Investment Effect?” Journal of Monetary Economics, Vol. 59, pp. 370–80.
Gilchrist, Simon and Charles Himmelberg, 1995, “Evidence on the Role of Cash Flow for Investment,” Journal of Monetary Economics, Vol. 36, pp. 541–72.
Li, Delong, Nicolas Magud, and Fabian Valencia, 2015, “Corporate Investment in Emerging Markets: Financing vs. Real Options Channels,” IMF Working Paper No. 15/285 (Washington: International Monetary Fund).
Magud, Nicolas and Sebastian Sosa, 2015, “Investment in Emerging Markets: We are Not in Kansas Anymore…Or Are We?” IMF Working Paper No. 15/77 (Washington: International Monetary Fund).
Prepared by Ivo Krznar (MCM) and Troy Matheson (WHD).
Economic policy uncertainty is measured using the Economic Policy Uncertainty (EPU) Index for Brazil in the same manner as the newspaper-based EPU Index for the United States, following the methods in “Measuring Economic Policy Uncertainty” by Baker, Bloom and Davis (see policyuncertainty.com and Appendix I, Section A for more details).
Note, variants of the model that include leverage and policy uncertainty in equation 1 were also estimated but leverage and policy uncertainty were not found to be statistically significant.
For example, expected GDP growth rate will be reflected in Tobin’s Q, terms of trade will affect cash flow, Tobin’s Q, sales; interest rates will affect cash flow and the interest coverage ratio. Specifications were examined that included a real interest rate and a nominal interest rate, but the associated coefficients were insignificant.
The empirical investment literature shows that lagged investment rate might be an important determinant of current investment spending (Gilchrist and Himmelberg, 1995; Eberly and others, 2012). In the case of Brazil, including lagged investment ratio as an explanatory variable did not significantly change the estimation results.
Different interaction terms were also explored such as between leverage and firm size (smaller firms tend to be more dependent on bank financing and have lower spare capacities and a lower ability to access alternative financing options leverage and uncertainty(firms with relatively higher leverage reduce investment more aggressively in response to higher uncertainty shock), cash flow and uncertainty (higher uncertainty could increase or decrease the marginal propensity to invest out of cash flows). None of these interaction terms were significant probably due to multicollinearity issues.
While this is potentially a large sample, the data is sparse and concentrated in the period from 2010 to 2016.
The cutoff values are 250 and −50 for investment to capital ratios, 20 and −20 for sales growth ratios and debt growth ratios, 10 and −10 for cash flow ratios, 50 and 0 for Tobin’s Q and 100 and 0 for leverage ratios.