Abstract
Using a large unbalanced panel of 11,812 publicly listed firms covering 11 major developing economies between 1997–2017, we detail a slowdown in investment rates post-2008: from 2013 for Chinese incorporated firms, and 2008 for others. We test competing explanations for slowing investment rates using a Bayesian ‘mixed effects’ model consisting of time-varying and country-varying coefficients. Firms’ estimated underlying mean impetus to invest (their ‘animal spirits’) falls more sharply than raw investment rates from 2008 to record lows by 2017. One-third of the variation in falling ‘animal spirits’ over time is statistically explained by the corporate sector’s changing median leverage, which declines by 40% since 2008. Firms’ investment rates have increasingly been sustained through external financing constraints loosening (as cash flow coefficients decline), and firms becoming more responsive to investment opportunities — reflected by time-varying Q regression coefficients increasing. At the country-level, we find that loosening external financing constraints is associated with greater responsiveness of firms to investment opportunities.
Published Version
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