Financial Constraints for Investment in Brazil

Abstract

The purpose of this work is to verify the existence of financial constraints for investment in Brazil, an emerging market with growing international visibility. Using panel data methodology and GMM, we estimate dynamic investment models based on the Euler equation and Tobin’s q for a panel dataset of 199 Brazilian nonfinancial firms for the time period 1995-2006. Our findings show that Brazilian firms face financial constraints since their investment depend on internally generated funds. Results are robust to different investment models based on the Euler equation, while controlling for growth opportunities. Significant investment-cash flow sensitivity has been found for the whole sample of firms. Subsamples of firms considered as under financial constraints, according to dividend payout and equity issuance policies, have higher investment-cash flow sensitivity. Investment-cash flow sensitivity of financially constrained firms in Brazil is higher than that in the UK and in Romania, a transition economy. These results extend empirical evidence of financial constraints in Brazil.

Keywords: investment, financial constraints, cash flow, Brazil, emerging market

JEL Classification: G31, G32