Financial Intermediation and Industrial Growth

Abstract

The aim of this work is to examine the effects of financial development and financial constraints on firm's investment decisions using data from 659 Brazilian firms over the 1998-2006 period. The research will be conducted within a theoretical and applied context, considering an econometric model with longitudinal data and assuming that the financial development exerts a substantial impact on firms' financial constraints, which is directly related to their investment decisions. There is an expansive theoretical and empirical literature that tries to analyze the impact of financial development on economic growth and the impact of financial constraints on firm behavior, but only few studies incorporate both literatures on works about investment decisions. The comprehension of mechanisms through which financial development and financial constraints affect corporate investments it's important not only because of their influence on firms' capital budgeting decisions, but also due to their relationship with the level of economic development. The absence of studies about this theme for Brazil represents an important contribution to understand how financial development influences the corporate behavior, especially in case of emerging economies, due to its intense relationship with macroeconomic issues, public policy, financial constraints in credit and capital markets, among others. In this way, the lack of studies regarding the research topic in question for Brazil will enable important contributions to this work regarding the role of financial development and financial constraints on investment decisions of Brazilian firms.