Business fixed investment: evidence of a financial accelerator in Europe

Philip Vermeulen

149 citations0/0 files storedOxford Bulletin of Economics and Statistics

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency Corporate Finance and Governance

Abstract

Financial accelerator theories imply that weak balance sheets can amplify adverse shocks on firm investment.This effect should be asymmetric, stronger in downturns than in upturns and stronger for small firms than for large firms.This paper privides empirical evidence of the presence of a financial accelerator in the four largest euro area economies: Germany, France, Italy and Spain.Using annual firm balance sheet data over the period 1983-1997 it is shown that weak balance sheets are more important in explaining investment during downturns than during upturns.It is further shown that the effects of the accelerator are largest for small firms.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1988Financing Constraints and Corporate Investment 1997Credit Cycles 1987Financing Constraints and Corporate Investment 1999Chapter 21 The financial accelerator in a quantitative business cycle framework 1994Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms 1996The Financial Accelerator and the Flight to Quality

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