Corporate Balance Sheet Restructuring and Investment in the Euro Area

IMF Working Papers, June 1, 2003

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Corporate Balance Sheet Restructuring and Investment in the Euro Area

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Bibliographic details

• Authors: Albert Jaeger
• Published: June 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451854039.001

Summary

• The recent boom-bust cycle in the euro area's equity valuations has left nonfinancial corporations saddled with a legacy of high debt or leverage.
• Models of corporate investment behavior based on imperfect capital markets predict that highly leveraged balance sheets can act as a brake on investment spending.
• The paper's empirical analysis suggests that leverage effects on corporate investment can be substantial and persistent, particularly if leverage exceeds threshold values.

Empirical findings

• Leverage can have substantial and persistent negative effects on corporate investment.
• The impact of leverage is particularly pronounced when leverage exceeds threshold values (thresholds not numerically specified in the source content).
• The analysis focuses on nonfinancial corporations in the euro area following a boom-bust equity valuation cycle.

Policy implications / Analytical conclusions

• High corporate leverage emerging from equity valuation cycles may constrain investment spending.
• Corporate balance sheet restructuring may be necessary to alleviate leverage-induced investment brakes.
• Policymakers and stakeholders should consider the persistence of leverage effects when designing interventions to support corporate investment.

Subjects and keywords

• Subjects: Business enterprises, Corporate finance, Corporate investment, Economic sectors, Financial institutions, Financial statements, National accounts, Public financial management (PFM), Stocks
• Keywords: balance sheet restructuring, business cycle, Business enterprises, Corporate finance, Corporate investment, Corporate investment and financing, cost of capital, debt-equity mix, equity, equity investment, equity valuation, financial asset, Financial statements, financing, forecasting, Global, investment, investment boom, investment opportunity, investment-capital ratio, Stocks, WP

Content in this bundle

• Corporate Balance Sheet Restructuring and Investment in the Euro Area - WP/03/117
  • Corporate Balance Sheet Restructuring and Investment in the Euro Area - WP/03/117 (Markdown version)
  • Corporate Balance Sheet Restructuring and Investment in the Euro Area - WP/03/117 (PDF)