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

27 Pages Posted: 7 Mar 2017

See all articles by Sophia Chen

Sophia Chen

International Monetary Fund (IMF) - Research Department

Yinqiu Lu

International Monetary Fund

Date Written: December 2016

Abstract

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 investment.

Keywords: Investment, Cyprus, Corporate sector, Balance sheets, Cyprus, corporate investment, balance sheet, leverage

JEL Classification: E22, E32, E44, G31, G32

Suggested Citation

Chen, Sophia and Lu, Yinqiu, Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus (December 2016). Available at SSRN: https://ssrn.com/abstract=2924354 or http://dx.doi.org/10.2139/ssrn.2924354

Sophia Chen (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Yinqiu Lu

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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