Financing Investment: The Role of Heterogeneity ebnem Kalemli- S - PowerPoint PPT Presentation

Financing Investment: The Role of Heterogeneity ¸ebnem Kalemli-¨ S Ozcan University of Maryland, CEPR and NBER EIB Annual Conference, 2017

Chapter 7: joint work with Annalisa Ferrando and Carsten Preuss 1 / 9

Slow Recovery in Europe: Sluggish Corporate Investment 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GFCF (NFC) Gross investment (average firm) Net investment (average firm) 2 / 9

Type of Investment Finance and Sluggish Recovery Too much debt on firms’ balance sheet: debt overhang problem ⇒ Low Investment Too much short term debt: rollover risk ⇒ Low Investment Too little equity financing: ⇒ reduces risk sharing and increases uncertainty ⇒ Low Investment Too much debt and low interest rates with financial frictions ⇒ misallocation of K ⇒ Low TFP 3 / 9

Can we Dig Deeper? Investment Types: EIBIS Data 70 % of Investment is in Fixed Tangible Assets 100 90 80 Software, data, IT networks and website activities 70 R&D 60 Machinery & equipment 50 Land, buildings and infrastructure 40 30 20 10 0 4 / 9

External Finance Over Time: ORBIS Data Firms with more than 50 % of their financing being external constitute largest fraction of firms. But this varies over time. 66 64 62 Percent of firms 60 58 56 54 52 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5 / 9 SMEs Large

Type of Finance and Investment: ORBIS-EIBIS Data External and Internal Finance seem to have equal roles in financing of different type of investment. 100 100 90 90 80 80 Trade credit Trade credit 70 70 External External 60 Internal 60 Internal 50 50 40 40 30 30 20 20 10 10 0 0 Land Machinery & R&D Software & Land Machinery & R&D Software & buildings & equipment databases buildings & equipment databases infrastructure infrastructure Figure: SMEs Figure: Large Firms 6 / 9

Type of Finance and Investment: EIBIS Data Internal Finance seems to have a bigger role especially for intangible investment. 100 100 90 90 80 80 Factoring & Factoring & 70 leasing 70 leasing Grants Grants 60 60 Market Market 50 50 Bank Bank 40 40 Insider Insider 30 30 Internal 20 20 Internal 10 10 0 0 Land Machinery & R&D Software & Land Machinery & R&D Software & buildings & equipment databases buildings & equipment databases infrastructure infrastructure Figure: SMEs Figure: Large Firms 7 / 9

Explaining the Discrepancy ORBIS is based on balance sheet accounting so we only use liabilities for financing, whereas EIBIS use both assets and liabilities as sources of finance EIBIS does not ask about trade credit and includes cash in internal finance, whereas ORBIS has cash under short term assets. 8 / 9

Key Takeaways from Regression Analysis Firms finance tangible assets mostly with external finance— ST and LT bank debt Firms who have more than 50 percent of their total financing from external sources increase investment more in the aftermath of the crisis—Importance of access to external finance SMEs use internal finance to finance intangible investment Trade credit was an important source of finance both for SMEs and large firms during the crisis Policy lesson 1: SMEs need to move from internal to external finance for their intangible investment, especially R&D. Policy lesson 2: Need less national rules/regulations to enhance more cross-border asset/equity ownership. 9 / 9