Économie et Statistique n° 341-342 - Investment and Financing of Firms
Greater Financial Constraints for small Businesses
The most striking feature of corporate investment patterns is that they are highly diverse. One of the most frequent explanations put forward for this considers the close interaction between a company's investment decision and its potential financing conditions. These conditions depend a great deal on the company's own characteristics. For example, literature on credit channels suggests that a company's capital level serves as a guarantee for its loans and hence reduces the rate at which it is financed. When a company decides to invest, it must therefore discount its future profits by taking into account the cost of external financing associated with credit market conditions and the fact that capital accumulation reduces the bank financing premium since capital is a guarantee of the company's own financing. This type of behaviour gives rise to diverse corporate and temporal investment levels. We use individual French business data covering the period from 1984 to 1999 to study whether such a scenario can explain investment trends. A company's level of guarantees effectively does explain significant differences in investment behaviour. This effect depends on both the type of company considered and the economic context. When evaluated in the light of interest rates, the resulting external financing premium is substantial, especially at the end of the period and despite the stabilisation of the companies' financial situation. However, when evaluated from the point of view of the economic profitability of the investments, the premium is low in the majority of cases. It only appears to play an important role for small enterprises at the end of the period.