Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus

December 22, 2016

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Format: Chicago

Sophia Chen, and Yinqiu Lu. Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Fixed investment was the most important contributing factor to the boom-bust cycle in Cyprus over the last decade. Investment boomed during a credit boom in mid-2000s, during which the corporate sector borrowed heavily. Investment collapsed after 2008 when the credit boom ended. Investment and corporate balance sheets further deteriorated during the Cypriot banking crisis over 2012–2014. Using firm-level investment and balance sheet data, we find that corporate indebtedness is negatively associated with investment both before and after the banking crisis, although the effect is weaker after the Cypriot banking crisis, possibly due to the reduced role of credit in driving post-crisis investment and growth. Our results suggest the need to repair corporate balance sheets to support sustainable invesetment.

Subject: Banking crises, Currencies, Financial crises, Financial statements, Labor, Money, Public financial management (PFM), Wages

Keywords: Balance sheet, Balance sheet strength, Banking crises, Cash holding, Corporate investment, Currencies, Cyprus, Debt maturity, Europe, Financial statements, Firm level, Global, Index firm, Investment decision, Investment rate, Leverage Author’s, Leverage ratio, Leverage-investment linkage, NFC debt, Southern Europe, Strength drives investment, Wages, WP, X crisis

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/248
Stock No:

WPIEA2016248
ISBN:

9781475563122
ISSN:

1018-5941

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