Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus
IMF Working Papers, December 22, 2016
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- Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus
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Bibliographic details
- Authors: Sophia Chen, Miss Yinqiu Lu
- Published: December 22, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475563122.001
Summary
- Fixed investment was the most important contributing factor to the boom-bust cycle in Cyprus over the last decade.
- Investment boomed during a credit boom in mid-2000s, during which the corporate sector borrowed heavily.
- Investment collapsed after 2008 when the credit boom ended.
- Investment and corporate balance sheets further deteriorated during the Cypriot banking crisis over 2012–2014.
- Using firm-level investment and balance sheet data, the authors find that corporate indebtedness is negatively associated with investment both before and after the banking crisis, although the effect is weaker after the Cypriot banking crisis, possibly due to the reduced role of credit in driving post-crisis investment and growth.
- The authors conclude that their results suggest the need to repair corporate balance sheets to support sustainable invesetment.
Empirical findings and analysis
- Data: firm-level investment and balance sheet data (as described in the paper).
- Relationship identified: corporate indebtedness — negative association with investment.
- Temporal variation:
- Pre-crisis (mid-2000s boom): strong role of credit and rising corporate borrowing associated with booming investment.
- Post-2008 collapse and 2012–2014 banking crisis: investment and balance sheets deteriorated further; the negative indebtedness-investment link remains but is weaker after the banking crisis.
- Interpretation offered: weaker post-crisis effect possibly reflects the reduced role of credit in driving post-crisis investment and growth.
Policy implications and recommendations
- Repair corporate balance sheets to support sustainable invesetment.
- Address corporate indebtedness as part of policies aimed at restoring and sustaining investment following credit booms and banking crises.
Key statistics and identifiers (as reported on the page)
- Date of working paper page: December 22, 2016
- Series: Working Paper No. 2016/248
- Pages: 26
- Issue: 248
- Volume: 2016
- DOI: https://doi.org/10.5089/9781475563122.001
- ISBN: 9781475563122
- ISSN: 1018-5941
Source: IMF Working Paper by Sophia Chen and Yinqiu Lu, December 22, 2016.
Content in this bundle
- Does Balance Sheet Strength Drive the Investment Cycle?