Monthly Bulletin April 2008 - European Central Bank - Europa

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ARTICLES Relationship between investment and financial position Profitability Indebtedness Debt burden coefficient p-value coefficient p-value coefficient p-value Business investment in the euro area and the role of firms’ financial positions Belgium 0.49 0.01 -0.06 0.07 -0.07 0.07 Germany 0.28 0.09 -0.02 0.85 -0.06 0.14 Spain 0.33 0.04 -0.06 0.03 -0.07 0.05 France 0.54 0.00 -0.06 0.01 -0.07 0.07 Italy 0.60 0.08 -0.08 0.03 -0.12 0.06 Netherlands 0.37 0.07 -0.11 0.18 -0.17 0.04 Euro area weighted mean 1) 0.43 -0.04 2) -0.08 Notes: For each financial indicator and each country, the coefficient captures the impact of a 1 percentage point increase in the ratio (for example, an increase in profitability from 5 to 6 percentage points). The investment rate is defined as the ratio of gross fixed capital formation to capital stock, cash flow as the ratio of cash flow to total assets, indebtedness as the ratio of debt minus cash and cash equivalents to assets, and debt burden as the ratio of interest payments to gross operating surplus plus financial revenue. 1) The coefficients for each country are weighted according to the share of that country in the aggregate gross fixed capital formation of Belgium, Germany, Spain, France, Italy and the Netherlands. 2) The coefficients on indebtedness for Germany and the Netherlands are set to zero as indebtedness is not found to be significant in these two countries. (and significant) coefficient is obtained in most countries for this variable, suggesting that a high level of debt can lead to balance sheet adjustments whereby firms defer or forego investment projects. Finally, the last two columns of the table report the results when financial pressure is proxied by debt burden. A clear negative effect is found, suggesting that debt servicing plays an important role in influencing the investment levels of firms. The results presented above can be used, together with the information on the average levels of debt burden across countries in 2005, to quantify the impact of a 25% increase in debt burden on investment, which approximately corresponds to a 100-basis-point increase in financing costs from the levels observed at the end of 2005. This simple calculation shows that the impact varies considerably across countries, with the reduction in investment rates ranging between 0.3 percentage point and 0.9 percentage point. This heterogeneity is the result of differences across countries in both the marginal impact of the debt burden on investment rates and firms’ financial positions. To evaluate the impact of this increase in debt burden in the euro area as a whole, the impact in each country is weighted according to the relative share of that country in the aggregate gross fixed capital formation of non-financial corporations for the six countries (derived on the basis of national accounts). According to this simple exercise, this 25% increase in debt burden would imply a reduction of slightly more than 0.4 percentage point in the euro area investment rate in the following year. 5 CONCLUSION As a result of capital market imperfections, financial factors, such as internally generated funds, indebtedness or the debt burden, have an impact on investment spending, in addition to the cost of capital. This article has explored the role that these financial factors have in explaining corporate investment developments in the euro area. It shows that firms with different financial positions tend to have different investment rates: firms with a higher cash flow tend to have higher investment rates, while firms with a higher debt burden or high indebtedness levels record lower capital expenditure. Econometric evidence corroborates the descriptive evidence on the relationship between investment and firms’ financial positions, indicating that the assessment of investment prospects can be improved by considering financial factors. ECB Monthly Bulletin April 2008 67
At the macroeconomic level, financial factors seem to contribute substantially to investment dynamics in specific circumstances, such as in periods of balance sheet restructuring and strong profit growth. Quantifying the role that financial factors have in explaining investment dynamics at the aggregate level is, however, difficult and microdata seem better able to provide evidence on the role that financial factors have in investment decisions. 68 ECB Monthly Bulletin April 2008
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EN EUROPEAN CENTRAL BANK MONTHLY BU
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© European Central Bank 2008 Addre
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ABBREVIATIONS COUNTRIES LU Luxembou
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months, moderating only gradually o
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ECONOMIC AND MONETARY DEVELOPMENTS
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Page 78 and 79: ability to deliver results, and pro
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Page 91 and 92: CONTENTS 1 EURO AREA OVERVIEW Summa
Page 93 and 94: EURO AREA OVERVIEW Summary of econo
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Page 99 and 100: EURO AREA STATISTICS Money, banking
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EURO AREA STATISTICS Euro area acco
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EURO AREA STATISTICS Euro area acco
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FINANCIAL MARKETS 4 4.1 Securities,
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EURO AREA STATISTICS Financial mark
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PRICES, OUTPUT, DEMAND AND LABOUR M
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EURO AREA STATISTICS Prices, output
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GOVERNMENT FINANCE 6 6.1 Revenue, e
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EURO AREA STATISTICS Government fin
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EURO AREA STATISTICS Government fin
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EURO AREA STATISTICS External trans
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EURO AREA STATISTICS Exchange rates
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EURO AREA STATISTICS Developments o
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TECHNICAL NOTES RELATING TO THE EUR
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EURO AREA STATISTICS Technical note
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EURO AREA STATISTICS Technical note
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OVERVIEW Developments in key indica
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EURO AREA ACCOUNTS Section 3.1 show
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seasonally adjusted growth rates ha
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using harmonised criteria and defin
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statistics, such as the MFI consoli
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ANNEXES CHRONOLOGY OF MONETARY POLI
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CHRONOLOGY 5 JULY, 2 AUGUST, 6 SEPT
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“Globalisation, trade and the eur
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853 “The cyclical behaviour of eq
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“Bond markets and long-term inter
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Debt (general government): the gros
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Fixed rate tender: a tender procedu
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MFI interest rates: the interest ra
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Monthly Bulletin April 2008 - European Central Bank - Europa

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