The impact of crises on investments and financing of Brazilian companies: an approach in the context of financial constraints

Abstract

The purpose of this paper is to investigate the impacts of financial crises on investments and financing of constrained and unconstrained Brazilian firms, specifically analyzing the impact of the 2008 subprime crisis and the 2015 Brazilian economic crisis. For this purpose, the companies were classified as constrained or non-constrained by the criterion of the existence or non-existence of ratings, using quarterly data between Q1 2007 and Q3 2016, and adopting the panel analysis as the method. The results indicate that only the Brazilian crisis of 2015 had a negative impact on corporate investments, with this impact being greater on constrained firms, with evidence that cash was more relevant to these firms. Regarding the impact of crises on leverage, the 2008 subprime crisis showed a greater negative impact on the leverage of constrained firms, accompanied by an increase in the proportion of short-term debt, mainly to these companies. KEYWORDS financial crisis, investment, financing, financial constraint, informational asymmetriesGiven the context of financial constraints, which is the greater limitation of certain companies` access to credit in comparison to others, authors such as Campello, Graham and Harvey (2010), Duchin, Ozbas andSensoy (2010) and Driver and Muñoz-Bugarin ( 2019) proposed the study of how crises, usually characterized by shocks in credit, impact factors such as corporate investments and financing, showing distinct effects on constrained and unconstrained companies. In this context, examining the Brazilian context through the lens of the aformentioned studies, two financial crises occurred in Brazil recently. These are the subprime crisis of 2008 and the economic crisis of 2015, which led to the following questioning: Were there significant impacts from the 2008 and 2015 financial crises on investments and financing of constrained and unconstrained Brazilian companies?The approach of this study refers, in essence, to the existence of informational asymmetries, in which some economic agents have more information than others. Fazzari, Hubbard and Petersen (1988), Calomiris and Hubbard (1990) and Hubbard (1998), among other authors, raised arguments that companies do not have a common resource supply curve, so some have easier access to credit compared to others, leading to the context of financial constraints, where the supply of resources is different for companies -companies may be more or less constrained to credit.In times of financial crisis, problems arising from informational asymmetries are intensified, undermining the channeling of resources to holders of the best investment opportunities (Mishkin, 1992). Mainly with the subprime crisis of 2008, evidence pointed out that, with the negative credit supply shock, its effects were different among companies. In these cases, on the one hand, for authors like Campello et al. (2010) and Duchin et al. (2010), the crisis proved to impact investments of financially constrained companies more sharply compared to unconstrained firms, since constr...

Investor sentiment, economic uncertainty, and monetary policy in Brazil,

“…-USP, São Paulo institutions tend to be wary of granting credit, raising the cost of external financing (McLean & Zhao, 2014) and reducing investment as a whole. In Brazil, the recent crisis in 2015 negatively impacted company investments and this impact was greater over financially constrained companies (Franzotti & Valle, 2020). This type of environment worsens financial constraints through financial attrition, reducing the allocation of capital.…”

Asset divestments, economic crisis, and the future performance of companies

“…Managers have more information than shareholders (Jensen & Mecking, 1976;Shaikh & O'Connor, 2020). Sometimes managers need to make decisions involving the sale of assets for various reasons (Campello, Graham & Harvey, 2010;Franzotti & Valle, 2020), but shareholders do not have information about the real reasons involved in the investment and divestment decisions regarding assets, due to the information asymmetry existing between the principal and the agent (Jensen & Mecking, 1976;Shaikh & O'Connor, 2020). On the one hand, companies invest for the most varied reasons: to increase production, technological innovation, productive efficiency, synergy in the business chain, industrial expansion (Fortunato et al, 2012), or profitability (Scherer;1965;Ross, 1995;Loss & Sarlo, 2006;Fortunato et al, 2012).…”

“…Farmer (2017) argues that such uncertainties trigger distrust of financial markets, cause credit shortages and, consequently, restriction of funding sources (Damasceno, 2019). This event contributes to declining levels of investment (Barbosa, 2017;Farmer, 2017;Sarjono et al, 2021) and consumption (Barbosa, 2017) in ways that resonate with firm performance (Egbunike & Okerekeoti, 2018) and lead firms to cancel valuable investments (Campello, Graham & Harvey, 2010;Franzotti & Valle, 2020). Lima, Assaf, Perena and Silva (2011) reported that financial restrictions caused by economic crises contribute to a increase in the indebtedness of companies, which favors the occurrence of bankruptcies.…”

“…Kolev (2016) records that asset divestments, in general, have a positive impact on company performance. In the business area, managers need to make decisions that often involve the flow of resources (Akinyera, 2015;Farmer, 2017;Nassif, 2017;Egbunike & Okerekeoti, 2018;Fuertes-Callén & Cuellar-Fernádez, 2019;Sarjono, Titisari & Pawenang, 2021) and even the sale of assets (Campello, Graham & Harvey, 2010;Franzotti & Valle, 2020). Managers have more information than shareholders (Jensen & Mecking, 1976;Shaikh & O'Connor, 2020).…”

“…Managers have more information than shareholders (Jensen & Mecking, 1976;Shaikh & O'Connor, 2020). Sometimes, managers need to make decisions involving the sale of assets for various reasons (Campello, Graham & Harvey, 2010;Franzotti & Valle, 2020), but shareholders do not have information about the real reasons involved in the investment and divestment decisions regarding assets, due to the information asymmetry existing between the principal and the agent (Jensen & Mecking, 1976;Shaikh & O'Connor, 2020).…”