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Financial development and financial constraint on firm\'s investment decisions: evidence for Brazil

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Fernanda de Castro
Total Authors: 1
Document type: Master's Dissertation
Press: São Carlos.
Institution: Universidade de São Paulo (USP). Escola de Engenharia de São Carlos (EESC/SBD)
Defense date:
Examining board members:
Aquiles Elie Guimarães Kalatzis; Milton Barossi Filho; Joao Vitor Moccellin
Advisor: Aquiles Elie Guimarães Kalatzis

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 is 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. With the aim of contributing to the scarce international literature and to the inexistent literature for Brazil, this study used the KZ index to classify firms as financially constrained and unconstrained. Through the use of macro data in a microeconomic analysis, the logit probability model was employed to find the main determinants of the financial constraint probability of Brazilian firms. To examine the relationship between financial development, financial constraints and firm\'s investment decisions, it was estimated a version of the accelerator model of investment by the generalized method of moments (GMM) due to its dynamic character and the presence of the endogeneity problem. The main results indicate that, beyond factors associated with the firm\'s financial structure, factors such as the financial development level and the long-term interest rate have influence on the likelihood of firm\'s financial constraint. Measuring the dependence of firms on internal resources by the sensitivity of investment to cash flow, the results also showed that financial development is more important for firms which are considered financially constrained by the fact that a higher level of financial development reduces the dependence on internal resources of these firms, decreasing their level of financial constraint. Higher levels of financial development were also associated with higher rates of investment and with a better allocation of capital when considering firms identified as financially constrained. These results were robust even when controlled by the economic growth rate, by different financial development variables and when firms were classified by capital intensity and investment rate. (AU)

FAPESP's process: 09/04550-0 - Financial Intermediation and Industrial Growth
Grantee:Fernanda de Castro
Support type: Scholarships in Brazil - Master