WHAT HAPPENED TO THE WILLINGNESS OF COMPANIES TO INVEST AFTER THE FINANCIAL CRISIS? EVIDENCE FROM LATIN AMERICAN COUNTRIES

• Author: María del Rocío Vega Zavala,Aydin Ozkan,Roberto J. Santillán‐Salgado,Yilmaz Yildiz
• DOI: http://doi.org/10.1111/jfir.12206
• Date: 01 May 2020
• Published date: 01 May 2020

The Journal of Financial Research Vol. XLIII, No. 2 Pages 231–262 Summer 2020

DOI: 10.1111/jfir.12206

WHAT HAPPENED TO THE WILLINGNESS OF COMPANIES TO INVEST

AFTER THE FINANCIAL CRISIS? EVIDENCE FROM LATIN AMERICAN

COUNTRIES

Aydin Ozkan

University of Huddersfield

Roberto J. Santillán‐Salgado

Tecnológico de Monterrey

Yilmaz Yildiz

University of Huddersfield

María del Rocío Vega Zavala

Tecnológico de Monterrey

Abstract

In this article we investigate the changes in corporate investment dynamics in the

aftermath of the global financial crisis. Using firm‐level data from sixLatin American

countries from 2002 to 2015, we show that firmsare less constrained and have greater

ability to invest after the crisis. However, the willingness of firms to invest optimally

is reduced. This is supported by strong evidence that during the postcrisis period

investment–cash flow sensitivity disappears, investment‐qsensitivity increases, and

the estimated speeds of adjustment for target investment decrease. Moreover, after the

crisis, firms notably increase their efforts to attain optimal cash and leverage levels.

Our analysis implies that firms may not always be willing to invest optimally. The

willingness to invest optimally appears to be time variant and moves together with

the dynamics of cash and leverage policies, albeit in opposite directions.

JEL Classification: G33, G34

I. Introduction

The capital expenditures of companies in the aftermath of the crisis have been

weak, which is inconsistent with the strong corporate profitability and lower cost of

borrowing observed after the crisis (Organisation for Economic Co‐operation and

Development [OECD] 2015). Recent evidence also shows that investment–cash flow

sensitivity (ICFS), generally taken as evidence of the existence of firm‐level financial

constraints, has weakened around the world.

1

Moreover, investment‐qsensitivity

1

Larkin, Ng, and Zhu (2018) show that ICFS has declined or disappeared in rich countries but it is stable

and persistent in countries with low levels of development. Chowdhury, Kumar, and Shome (2016) find that

ICFS declines following the Sarbanes–Oxley Act and increases during the deregulation period. Moshirian et al.

(2017) document that ICFS is more stable in developing economies in which firms have more tangible capital

and persistent cash flows.

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© 2020 The Southern Finance Association and the Southwestern Finance Association

(IQS) increased in the aftermath of the financial crisis, which is interpreted as an

indication of greater investment efficiency.

2

These findings point to a greater ability

of firms to take up investment opportunities, whereas the weak investment growth

possibly suggests that the willingness to exploit these opportunities is not sufficiently

strong.

Motivated by such puzzling combination of weak corporate investment growth

and increased investment power, we investigate corporate investment dynamics from

2002 to 2015 using a large sample of firms in six Latin American countries.

3

Specifically, we examine (1) whether there is indeed a divergence between the ability

and willingness of firms to invest optimally, (2) how corporate investment behavior

and dynamics are affected by the financial crisis, and (3) how the investment behavior

of firms compares to the dynamics of optimal leverage and cash holdings before

and after the financial crisis. We not only aim at providing key insights into recent

anomalies in corporate investment behavior, but also highlight the ways in which they

can be in part explained by and related to the dynamics of other corporate policies.

The analysis is carried out by a detailed examination of three important aspects

of corporate investment: ICFS, IQS, and the adjustment speed of target investment.

Investigating the investment sensitivities enables us to draw inferences about the

investment behavior of firms. We do so by empirically analyzing their reliance on

internally generated funds to invest and the responsiveness of investment expenditures

to growth opportunities, as well as the firm‐specific factors that are likely to affect the

changes in both sensitivities. Furthermore, the analysis of adjustment speed allows us

to study the persistency in corporate investment over time, across different periods and

groups of firms. It also helps us provide further insights into the changing importance

of attaining optimal investment levels, compared to other financial policies.

Our analysis contributes to the literature on corporate investment in several

ways. First, in addition to a detailed examination of ICFS, we provide a comprehensive

analysis of the sensitivity of investment to growth opportunities. Although ICFS is

generally related to supply‐side dynamics and financial constraints, IQS is driven by

the responsiveness of firms to investment opportunities and it complements the

ICFS analysis in drawing inferences on the ability of firms to invest optimally. IQS

strengthens during periods characterized by more efficient capital markets and

stronger corporate governance (McLean, Zhang, and Zhao 2012; Kusnadi, Titman, and

Wei 2009). In line with earlier studies, we interpret increasing (decreasing) IQS as

2

Following research on corporate investment efficiency (e.g., Stein 2003; Chen et al. 2011; Chen

et al. 2017; Jiang, Kim, and Pang 2011), we use the sensitivity of investment expenditures to investment

opportunities as a measure of investment efficiency.

3

The countries included in the sample—Argentina, Brazil, Chile, Colombia, Mexico, and Peru—are among

the relatively fast‐growing emerging markets, characterized by greater growth opportunities, albeit facing

difficulties in accessing external funds for private and public investment. Research on the corporate investment

in Latin American countries is limited. One notable exception is Moshirian et al. (2017), who include firms from

Latin American countries in their sample of 41 countries. Also, Magud and Sosa (2015) of the International

Monetary Fund investigate corporate investment in Latin American countries and show that growth opportunities

and commodity export prices have a positive and leverage has a negative impact on investment.

232 The Journal of Financial Research

evidence of improving (deteriorating) investment efficiency and a greater (lower)

ability of firms to convert growth opportunities into investment.

Second, we explore the impact of the financial crisis of 2008 on the investment

behavior of firms. The crisis provides us with a unique opportunity to examine

corporate investment in a setting where firms experience unanticipated external shocks.

Our sample period allows us to distinguish between corporate behavior before, during,

and after the crisis, where each subperiod is characterized by significantly different

economic conditions and market sentiment. The examination of corporate investment

patterns in this framework proves valuable to gauge the importance of external factors

in the determination of investments and, remarkably, whether the financial crisis

changed corporate investment behavior.

Third, we investigate the effects of the financial crisis on the speed of

adjustment to target investment levels. We acknowledge that observed investment is

different, on average, from optimal levels. Although being away from the target is

costly to firms, adjusting to the optimal level also involves costs, which can prevent

firms from achieving their desired adjustment instantaneously. Examining the

adjustment process complements the analysis of investment and helps us distinguish

between the ability and willingness of firms to invest optimally. For example, if the

adjustment speed reduces when the adjustment costs are expected to be lower, this can

the point to a reduced willingness to attain desired levels of investment quickly.

Moreover, we investigate how the extent to which firms are financially constrained

affects the speed of investment adjustment.

Finally, we examine the dynamics of corporate investment in conjunction with

other financial decisions. Although we do not establish the link directly, we note that

the misalignment between the ability and willingness of firms to invest optimally can

be related to their positions regarding optimal cash holdings and leverage levels.

We maintain that the costs of target adjustment in the favorable postcrisis market

conditions are on average notably lower. Moreover, we have no reason to expect that

these costs differ significantly across investment, leverage, and cash holdings

decisions. We postulate that the estimated speeds of adjustment reveal information

about the willingness of firms to attain target levels and hence about their perception

regarding the relative importance of each policy. More important, providing evidence

for both the pre‐and postcrisis periods, and across subgroups of firms, enables us to

shed light on the factors that determine adjustment speed.

Overall, our findings reveal that the ability of firms to invest optimally

increases significantly in the postcrisis period, as evidenced by the estimated

insignificant (significant) ICFS (IQS). We argue that this is mainly due to more

favorable credit conditions, lower cost of external capital, and stronger corporate

governance, which prevail in the aftermath of the crisis. However, during the same

period, the adjustment speed of firms toward optimal investment drops significantly.

This finding is robust to controlling for factors that may affect the speed of adjustment

and the extent to which firms can be financially constrained. Furthermore, in the

postcrisis period, the speed of adjustment to leverage and cash‐holdings targets

increases significantly. Finally, the adjustment to cash holdings is faster than to

leverage, both in the pre‐and postcrisis periods. We take this finding as evidence for a

233What Happened to the Willingness of Companies?