What are firms borrowing for? The role of financial assets

Abstract

Recent studies show that nonfinancial corporate debt is weakly correlated with aggregate demand, raising the question: Why is the nonfinancial corporate sector borrowing? We use flow of funds data for fifteen advanced economies since 1990 to econometrically show that nonfinancial corporate borrowing primarily finances financial asset accumulation. We show that an increase in borrowing of one percent of GDP is associated with an increase in capital expenditures of only 0.013 percent of GDP, but a 0.82 percent of GDP increase in the acquisition of financial assets net of non-debt liabilities. This rise in net financial asset acquisition is dominated by gross financial asset accumulation. Furthermore, corporate borrowing is primarily associated with non-cash financial assets, and is not associated with foreign direct investment. These results suggest that the nonfinancial corporate sector’s growing orientation toward accumulating financial assets underlies the weak relationship between their borrowing and aggregate demand.