Journal of International Money and Finance: Juan Fernández de Guevara, Joaquín Maudos, Carlos Salvador

Journal of International Money and Finance 110 (2021) 102288
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Journal of International Money and Finance

journal homepage: www.elsevier.com/locate/jimf
Effects of the degree of financial constraint and excessive

indebtedness on firms’ investment decisions q
Juan Fernández de Guevara a,b,⇑, Joaquín Maudos a,b, Carlos Salvador a
a
Department of Economic Analysis, University of Valencia, Av. dels Tarongers, s/n., 46022 Valencia, Spain
b
Ivie, C/ Guardia Civil 22, Esc. 2, 1◦, 46020 Valencia, Spain
a r t i c l e i n f o a b s t r a c t
Article history: The aim of this paper is to provide empirical evidence of the importance of financial vari-
Available online 25 September 2020 ables in explaining differences in investment rates among firms. The main contributions of
the study are twofold: the use of a variable that approximates the degree of financial con-
JEL classification: straint, and the effect of indebtedness on investment is allowed to be non-linear. The
E22 empirical application to the case of Spain is of interest because of the large proportion of
G32 SMEs among Spanish firms (SMEs being highly dependent on bank financing) and the dras-
Keywords:
tic tightening of credit conditions in Spain during the banking crisis. The results provide
Corporate investment evidence of the impact of financial constraints on firms’ investment behavior—an impact
Indebtedness distinct from, and far greater than, that of indebtedness. Overall, above a debt-to-asset
Financial restrictions ratio of 53%, the negative impact of indebtedness increases. The impact increased signifi-
Threshold model cantly after the financial crisis, suggesting that when dealing with highly indebted firms,
banks became more risk averse, thus further constraining access to credit. Conversely,
for large, most productive, and exporting companies, leverage has a positive effect,
although this effect decreases with indebtedness. From an economic policy point of view,
the results show the importance of banking regulation in preventing corporate indebted-
ness from reaching levels where it becomes a drag on investment.
Ó 2020 Elsevier Ltd. All rights reserved.
1. Introduction
The recent economic crisis has revived interest in analyzing the importance of financial variables in explaining the behav-
ior of corporate investment mainly among small and medium enterprises, which are more dependent on bank financing.
Constraints on access to finance and increased financial vulnerability as a result of low profitability and high levels of indebt-
edness make an explosive combination that has taken a huge toll on investment by companies. In this line, some recent stud-
ies show a negative relationship between corporate debt and investment (Lang et al., 1996; Aivazian et al., 2005a; IMF, 2016;
Gebauer et al., 2018). The weak recovery in investment seen in many countries may therefore be due in part to high corpo-
rate indebtedness. However, the effect of indebtedness on investment is not necessarily linear, since while excessive levels of
q
Juan Fernández de Guevara and Joaquin Maudos gratefully acknowledge financial support of the Spanish Ministry of Science and Innovation (research
project ECO2017-84858-R).
⇑ Corresponding author at: Department of Economic Analysis, University of Valencia, Av. dels Tarongers, s/n., 46022 Valencia, Spain.
E-mail address: Juan.fernandez@ivie.es (J. Fernández de Guevara).
https://doi.org/10.1016/j.jimonfin.2020.102288
0261-5606/Ó 2020 Elsevier Ltd. All rights reserved.
J. Fernández de Guevara, Joaquín Maudos and C. Salvador Journal of International Money and Finance 110 (2021) 102288
debt can be detrimental to investment, in many cases investment is only possible with access to external financing. In other
words, it may be that the negative debt-investment relationship is observed only above a certain threshold of indebtedness.
Arguments can also be made to support the view that the level of indebtedness has limitations as a determinant of invest-
ment. It is not so much the amount of debt a firm takes on that can limit investment as the degree of constraint on access to
finance. That is to say, the real variable to explain investment would be the latter, the degree of credit constraint. Conse-
quently, the level of debt may therefore be a poor proxy for credit conditions (price and quantity), as some firms are able
to increase their debt and thus also their investment precisely because they are not financially constrained. This seems to
have been the case for firms in the construction sector during the years of expansion in some European countries, particu-
larly Spain. Loose credit conditions in Spain meant that firms were not financially constrained and so greatly increased their
level of indebtedness during that period, allowing them to achieve high investment rates. However, both indebtedness (par-
ticularly when it is excessive and absorbs a large part of a firm’s operating income) and the degree of financial constraint
contribute to explaining the observed differences in companies’ investment rates, so it makes sense to consider them simul-
taneously as determinants of investment.
The aim of this paper, in this context, is to provide evidence of the effect that a firm’s financial health has on its invest-
ment. To this end, we construct an indicator of the degree of financial constraint, which, as we shall see, contributes addi-
tional information to the effect of indebtedness. The paper thus contributes to the literature by considering an indicator of
financial constraint based on the relationship of the firm’s financing needs to (external and internal) sources of funding. Con-
sequently, this allows us to distinguish between different levels of financial constraints, and not just a single indicator as in
previous studies. We also test the hypothesis that the influence of indebtedness on investment is non-linear, as there may be
different regimes or thresholds beyond which the impact of debt on investment differs. Specifically, we adopt the approach
proposed by Hansen (1999, 2000) and applied by Gebauer et al. (2018) to corporate investment decisions. This approach
relies on a specification of the endogenously determined threshold that sets the point beyond which the direction and size
of the effect of indebtedness changes.
To test the effect that over-indebtedness and access to finance have on firm investment, we examine the particular case of
Spain. Spain is a good laboratory for analyzing the impact of financing conditions on investment for four main reasons: 1)
during the analyzed period there was an intensive deleveraging process and a tightening of credit conditions; 2) Spain
has a large presence of SMEs, which are highly dependent on bank financing and are therefore more sensitive to financing
conditions; 3) the scale of the banking crisis (the Spanish banking system underwent a profound restructuring) led to a sharp
tightening of credit terms, as reflected in the European Central Bank surveys; and 4) the recent cycle of over-investment and
over-indebtedness, particularly in real estate assets, which may not be the best choice for improving production efficiency.
We use the SABI database (Bureau van Dijk and INFORMA, 2017) for the period 2008–2016, which allows us to analyze both
the period of economic crisis (2008–2013) and the period of recovery (2014–2016).
The results confirm the importance of indebtedness and access to finance for firms’ investment decisions. In fact, the
degree of financial constraint emerges as the main determinant of corporate investment. In particular, the results show that
the net investment rate of firms that are not financially constrained is more than 7.8 percentage points higher than that of
firms subject to some degree of constraint. The results also provide evidence of a negative non-linear impact of debt on
investment, given that the impact is greater above a threshold debt-to-asset ratio of 53%, approximately in the 72th per-
centile of the distribution of indebtedness. This effect increased significantly after the financial crisis, suggesting that banks
became more risk averse, further constraining access to credit. Furthermore, the results provide evidence that the effect of
leverage decreases as firm size increases, and that the effect of the degree of financial restriction on the investment rate is
lower for large companies. In the most productive and exporting companies leverage has a positive effect. However, for high
levels of indebtedness––above the threshold––this positive effect decreases, even becoming negative in the case of expor-
ters, and the financial constraints have a lower impact on investment decisions.
Following this introduction, the paper is organized as follows. Section 2 reviews the literature on the effect of financing
conditions on corporate investment, including evidence from Spain. Section 3 describes the database used and the construc-
tion of the variables applied to explain the investment rate. Section 4 presents the results of the estimation of the equation
that explains the investment rate and the economic impact of its determinants. Section 5 details some robustness checks,
and Section 6 sets out the conclusions and implications for economic policy.
2. Financing conditions and investment: Related literature
Various theoretical arguments show that the problems of asymmetric information, agency, monitoring costs, etc. give rise
to a cost differential between equity financing and debt financing, so that a firm’s funding structure affects its value (Myers,
1984; 2001; Myers and Majluf, 1984). In the presence of such market imperfections, the Modigliani-Miller theorem (1958)—
which says that, under the assumption of a perfect capital market, equity and debt financing are perfect substitutes so a
firm’s investment decisions are independent of how the firm is financed—does not hold. In an imperfect market, therefore,
how a firm is financed is important because it affects the firm’s value.
2
The implications of market imperfections in financial intermediation for investment have been analyzed in numerous
studies.1 This body of research concludes that the cost of debt financing decreases as a firm’s net worth increases, so any shock
that reduces net worth will lead to an increase in the risk premium and the cost of financing and, in turn, to a fall in investment.
The initial impact of a negative shock is thus amplified by the decline in investment, giving rise to what is termed the financial
accelerator effect.
The above reasoning has implications for the effectiveness of monetary policy in influencing investment. For instance, a
rise in interest rates affects investment in two ways: on the one hand, through an increase in the user cost of capital; and on
the other, through a fall in net worth, resulting in an increase in the cost differential between equity financing and debt
financing. Moreover, this effect of monetary policy is greatest in the firms that are most dependent on bank financing, which
tends to be a function of firm size.
The importance of credit conditions or financial constraints in explaining investment increases the further a firm is from
the conditions that define a perfect capital market. The greater the problems of information, incentives, etc., the greater the
importance of the terms of access to finance. Smaller firms (SMEs) are more likely to be constrained than large firms because
of their information opacity, greater information asymmetry, higher failure rate, fewer opportunities available to owners-
managers for wealth diversification, relative scarcity of collateralizable assets and excessively high monitoring costs (Beck
et al., 2008; Danielson and Scott, 2007; De La Torre et al., 2008; Rostamkalaei and Freel, 2016; López-Gracia and Mestre-
Barberá, 2011; Zubair et al., 2020). Furthermore, SMEs are more dependent on bank credit for external finance compared
to larger firms that have easy access to public capital markets (Berger and Udell, 1995; Bremus and Neugebauer, 2018;
Gertler and Gilchrist, 1994; Moscalu et al., 2020).
For this reason, with the outbreak of the Global Financial Crisis in 2008 and the subsequent credit crunch, SMEs experi-
enced an increase in the financial constraints they face, producing a negative effect on their investment and growth oppor-
tunities. However, the literature available on the relevance of the financial conditions on SME investment is scarce. Beck et al
(2008) show that SMEs are more prone to suffer from credit constraints and are more dependent on internal funds than large
firms. Furthermore, these authors find that firms that relied more intensively on long-term debt before the crisis suffered
more credit constraints (had more difficulties to renew their debt) and that this fact was related to lower investment rates.
Berger and Udell (2002) show that small firms not only had more difficulties accessing funds but also bear a high cost of the
external finance. Then, SMEs suffer more credit constraints than large firms in general, and particularly during credit
crunches. These credit frictions result in lower investment rates (Zubair et al., 2020, Vermoesen et al., 2013, Akbar et al.,
2013) and firm growth (Moscalu et al., 2020).
In order to approximate whether a firm is financially constrained various metrics have been put forward in the literature
taking as a reference the seminal contribution of Fazzari et al. (1988), which used the sensitivity of investment to cash flow
as an indicator of financial constraint.2 The intuition is that if a firm has difficulties accessing finance, investment will be con-
ditional on the existence of capital generated internally by the firm. Furthermore, constrained firms are obliged to withhold div-
idends in order to finance investment, so dividend policy is considered a proxy for the degree of financial constraint. The
sensitivity of investment to cash flow in constrained and unconstrained firms is therefore estimated separately to verify
whether the sensitivity is in fact greater in constrained firms.
This approach has been criticized on several counts: the use of dividend policy to identify financially constrained firms
(Kaplan and Zingales, 1997, 2000); the existence of a non-linear relationship between investment and cash flow (Povel
and Raith, 2002); measurement errors in approximating investment opportunities by Tobin’s Q, etc. These criticisms have
spawned other approaches, such as the estimation of a reduced form of Euler’s equation.
Another approach to identify financially constrained firms involves studying firms’ liquidity demand (Almeida et al.,
2004). Unlike firms that have access to external financing, financially constrained firms must manage and optimize their
stock of liquidity to take advantage of possible future investment opportunities.
Other studies have used different variables to distinguish financially constrained firms from the rest: the pay-out ratio
(percentage of profit paid out as dividends), a firm’s age, its size, its credit rating, the rejection rate in loan applications,
the amount received compared to the amount requested, indexes based on several of the above variables, the characteristics
of the bank a firm works with, and so on.
One of the variables most frequently used to measure the importance of the financing conditions a firm faces as a deter-
minant of investment is its level of indebtedness (and the consequent increase in debt service payments), particularly in the
aftermath of the financial crisis. Several studies have uncovered a negative relationship between corporate indebtedness and
investment (Lang et al., 1996; Aivazian et al., 2005a; IMF, 2016), as higher leverage constrains firms’ ability to obtain external
financing. The negative effect of leverage may be greatest in the case of small firms, as they are more dependent on bank
financing and severely limited in their ability to raise capital in the market (Cowling et al., 2016; Mol-Gómez-Vázquez
et al., 2019). Similarly, other studies have shown that the level of long-term indebtedness has a negative effect on investment
(Aivazian et al., 2005b).
In the case of Spain, very few studies use firm-level data to analyze the impact of financial constraints, indebtedness and
banking relationships on investment. Dejuán et al. (2018) and Herranz and Martínez Carrascal (2017) show the importance
1
See a survey in Claessens and Kose (2017).
2
Subsequent contributions include Fazzari et al. (2000) and Carpenter and Petersen (2002).
3
of the financial position in a firm’s investment, although they assume a linear effect of debt and do not use a proxy for finan-
cial restrictions.
A novel approach to analyzing the possible non-linear effect of indebtedness on corporate investment is the recent study
by Gebauer et al. (2018). Unlike other studies, which rely on an ad hoc, exogenous specification of the threshold beyond
which the direction and size of the effect of indebtedness changes, these authors propose an empirical approach that esti-
mates the threshold endogenously, using data on companies in five vulnerable peripheral eurozone countries (Italy, Spain,
Greece, Portugal and Slovenia) during the period 2005–2014. Their results show that there is indeed a non-linear relation-
ship between indebtedness and investment, setting the threshold at a debt level (debt-to-asset ratio) of around 80–85%. In
firms that exceed this threshold the negative impact of debt on investment is greater, while in firms with debt holdings
below the threshold the relationship of debt to investment is less clear. Also, the negative impact of debt is greatest in
the years of financial crisis and in low-debt firms. These authors also find that this negative effect depends on firm size.
In micro and small enterprises, debt affects investment negatively for both high- and low-debt firms (although the impact
is greatest above a certain debt threshold), whereas in medium-sized firms the effect is significant only above a certain level
of debt and in large firms debt has no effect on investment. Finally, the authors show that the problems associated with
indebtedness can appear not only when a firm has a high stock of debt, but also when the stock is lower but the burden
of debt service is high, making the firm financially vulnerable.
3. Sample and variables used: Descriptive statistics
At the firm level, we use the SABI database (Sistema de Análisis de Balances Ibéricos, Spanish partner of the ORBIS data-
base), which provides information on the financial statements (balance sheets and income statements) of more than one mil-
lion Spanish firms.3
Several filters were applied to the original sample provided by SABI, which yielded a final sample of slightly more than
738,000 observations from 2008 to 2016, corresponding to 176,910 firms that filed non-consolidated financial statements.4
This period allows us to analyze the effect of the intensive deleveraging process and a tightening of credit conditions on cor-
porate investment as a consequence of the economic downturn and the profound restructuring of the Spanish banking system.5
The dependent variable is the net investment rate in percentage terms, which is defined as the ratio of net investment
(gross investment less depreciation) to the value of the capital stock. In studies using microeconomic data, it is common
practice to approximate gross investment as the change in fixed assets in real terms (IMF, 2016; Gebauer et al., 2018;
Dejuán et al., 2018, etc.). The investment deflator is specific to each sector (27 branches of activity according to the NACE
rev 2 classification). Note that we use net investment because it is more closely linked to a firm’s long-term viability than
gross investment, where the capital still has to be depreciated. Consequently, net investment is what ensures the increase
in production capacity and productivity gains in the economy (Lang et al., 1996).
The first of our explanatory variables is the debt ratio (Leverage), defined as the ratio of year-end holdings of interest-
bearing debt (current and non-current) to total assets. We exclude trade credit, as it typically serves for transaction purposes
and not for financing investments (Gebauer et al., 2018).
Following the studies cited in the previous section, we use the following explanatory variables of investment that also
define a firm’s financial situation.
Profitability is defined as return on assets (ROA), i.e. the ratio of operating profit to total assets. The higher a firm’s prof-
itability, the higher the expected investment rate. Future growth opportunities are captured by the logarithmic growth rate
of sales (Sales growth). An increase in sales is expected to motivate a firm to increase its investment, and a firm’s investment
is expected to increase with profitability.
The interest coverage ratio (ICR) variable is defined as the ratio of EBITDA (earnings before interest, taxes, depreciation
and amortization) plus interest income to interest expense. By using this definition of financial vulnerability, firms with a
higher interest coverage ratio are expected to have higher investment rates.
Table 1 shows descriptive statistics of the variables for the whole study period (2008–2016) and for the financial crisis
(2008–2013) and recovery (2014–2016) subperiods. The variable of interest, the (unweighted) average net investment rate,
was negative for the period as a whole (-1.66%) but was lowest in the crisis years (3.72%), before picking up in the recovery
years (0.98%). It should be noted that the weighted averages––according to firm size––are higher, with significant differ-
ences between subperiods. This shows that the investment rate depends positively on firm size. Specifically, net investment
over the whole period was 1.68%, compared to 0.75% in the crisis years and 2.8% in the recovery period. The greater stability
of the weighted average net investment rate compared to the unweighted rate indicates that large firms were able to main-
3
Informa and Bureau van Dijk (2018).
4
Outlier firms were excluded on the following grounds: 1) firms that are not active or do not have a primary activity code, according to the NACE Revision 2
classification of economic activities; 2) firms with total assets equal to or less than zero (negative equity); 3) firms with a legal form other than that of a
commercial enterprise; 4), as in other studies in the literature (Gebauer et al., 2018), firms that were not included in the data set for at least three consecutive
years. Other firms excluded in the sample were those whose sales growth in absolute value exceed 125% annual growth and those above the 99th percentile
and below the 1st percentile in average real-wage rates, investment-to-capital ratio, interest coverage ratio (IRC), leverage, ROA or sales growth rate.
5
Note that the starting year is 2008 because the interest-bearing debt for previous years could not be accurately estimated from the information provided by
SABI.
4
Table 1
Descriptive statistics of the sample by subperiod. Source: Bureau van Dijk and authors’ calculations.
(a) 2008–2016
Non-weigthed mean Weigthed mean Standard deviation p25 p50 (Median) p75
Net Investment (%) 1.66% 1.68% 31.71% 11.48% 4.35% 0.00%
Gross Investment (%) 13.01% 15.57% 33.14% 0.17% 2.46% 12.52%
Leverage (%) 37.67% 40.34% 21.42% 19.84% 36.19% 53.88%
Sales growth (%) 0.90% 1.33% 24.31% 11.09% 0.12% 10.56%
ROA (%) 6.21% 6.95% 9.42% 2.43% 5.61% 9.92%
ICR 186.01 125.79 9584.87 2.07 5.81 18.71
Lassets 7.07 1.59 5.97 6.94 8.03
Assets (thousands of euros) 7794.62 104123.20 390.00 1034.00 3071.00
2008–2013
Mean Weighted mean Standard deviation p25 p50 (Median) p75
Net Investment (%) 3.72% 0.75% 29.15% 12.77% 5.21% 1.00%
Leverage (%) 38.59% 40.35% 21.67% 20.54% 37.25% 55.10%
Sales growth (%) 4.72% 1.09% 24.94% 15.30% 3.34% 7.28%
ROA (%) 5.38% 6.57% 9.51% 1.98% 5.28% 9.29%
ICR 120.59 75.73 7325.23 1.63 4.64 14.30
Lassets 7.06 1.58 5.96 6.92 8.00
2014–2016
Mean Weighted mean Standard deviation p25 p50 (Median) p75
Net Investment (%) 0.98% 2.80% 34.52% 9.61% 3.31% 2.13%
Leverage (%) 36.50% 40.33% 21.04% 18.98% 34.87% 52.31%
Sales growth (%) 3.97% 4.26% 22.56% 5.15% 3.86% 13.72%
ROA (%) 7.27% 7.42% 9.19% 2.93% 6.04% 10.80%
ICR 269.49 186.43 11857.91 2.78 7.81 25.39
Lassets 7.09 1.60 5.98 6.97 8.06
tain their investment throughout the period. We also observe high dispersion, as for the whole period the difference between
the 25th percentile and the 75th percentile of net investment is more than 11 percentage points. This dispersion is also
observed in the two sample subperiods, although it declines significantly during the recovery period. Fig. 1 shows the
year-to-year changes in the net investment rate following the collapse of investment in 2008 as a result of the financial crisis.
Specifically, a sharp drop is observed in net corporate investment, from 21.7% in 2008 to 0.2% in 2009. This rate remained
negative until 2013, but picked up in the recovery years, reaching 17.87% (gross) and 2.9% (net) in 2016.6
Investment behavior is consistent with an average return on assets of 5.38% (weighted 6.57%) in the crisis years, rising to
an average of 7.27% (7.42%) in the recovery years. The average sales of Spanish firms fell 0.8% over the period, the net result of
a fall of 4.72% in the crisis years and an increase of 3.9% in the recovery phase. There is wide dispersion in profitability and
sales growth across firms. For example, in the crisis years, 25% of the firms in the sample had a return on assets of less than
1.98%, while 25% of the most profitable firms had a return of more than 9.29%.
Table 1 shows that the average debt-to-asset ratio of the Spanish firms in the sample was 37.67%, fairly close to the med-
ian (36.19%) and the weighted average (40.4%). Again, there are major differences among firms, as the debt ratio of the 75th
percentile (53.88%) is 2.71 times higher than that of the 25th percentile (19.84%). As a result of over-indebtedness among
Spanish firms in the years prior to the financial crisis, the post-crisis phase was characterized by steady deleveraging, which
even accelerated in the more recent years of economic recovery.
Fig. 2 illustrates the relationship between firms’ net investment rate and their level of indebtedness, classified in four
quartiles. For the period as a whole, the investment rate of the least indebted firms (first quartile) is 0.2%, falling to negative
values in the last quartile (6.3%). The same pattern is repeated in the crisis and recovery subperiods: the least indebted
firms (first quartile) consistently show higher, more stable investment rates than the rest. Similarly, the most indebted firms
had negative investment rates, below 5%. The negative relationship between investment and indebtedness is also observed
in the intermediate quartiles.
As we can see in Table 1, the interest coverage ratio (defined as the ratio of EBITDA + interest income to interest expense)
also improved substantially in the post-crisis recovery period. In unweighted average terms, the firms in the sample had an
interest coverage ratio of 120.59 (weighted average 75.73) in the crisis years and 269.49 (186.43) in the recovery period
6
The average values of the investment rate in the two subperiods analysed are relatively similar to those reported by Herranz and Martínez Carrascal (2017)
using a sample of Spanish firms from the Integrated Central Balance Sheet Data Office Survey (Bank of Spain). The behaviour over time and the level are also
consistent with the macroeconomic investment rate of the National Accounts and BBVA-Ivie Foundation series. In the case of net investment, the BBVA-Ivie
Foundation series give an average rate of 0.8% from 2008 to 2015, which coincides with ours.
5
25%
21.7%
20%
15%
10%
5%
2.9%
0% -0.2%
-5%
-10%
2008 2009 2010 2011 2012 2013 2014 2015 2016
Net Investment
Fig. 1. Trend in net investment of the firms in the sample (Net investment/Capital stock, percentage). Source: Bureau van Dijk and authors’ calculations.
4% 3.0% 3.1%
2.3%
2%
0.2%
0%
-0.2%
-2% -1.0%
-1.4%
-2.0%
-4% -2.8%
-6% -5.0%
-6.3%
-8% -7.0%
Percenle 25 Percenle 50 Percenle 75 Percenle 100
2008-2016 2008-2013 2014-2016
Fig. 2. Net investment rate by quartiles of the debt-to-asset ratio (percentage). Source: Bureau van Dijk and authors’ calculations.
(2014–2016). This value is high if we look at the distribution of firms. Specifically, the median is much lower: only 4.64 in the
crisis years and 7.81 in the recovery period. The difference between the average (simple and weighted) and the median is due
to the existence of a small number of firms with very high interest coverage ratios, on account of having very little debt and
therefore close to zero interest expense. For a given level of earnings, as the interest expense (in the denominator)
approaches zero, the ratio increases, reaching 907.9 in the 99th percentile (not shown in the table) during the crisis.7 In
the recovery phase, however, firms’ interest coverage ratio decreases. As in the variables discussed earlier, the dispersion among
firms is much greater than the differences between periods.
Since the debt ratio has limitations as an indicator of financial constraint,8 we construct an indicator of the degree of finan-
cial constraint. Specifically, we follow the approach of Pál and Ferrando (2010), whose indicator of financial constraint is based
on the relationship of financing needs to (external and internal) sources of funding. We do this using information from the bal-
ance sheets and income statements.9 The intuition behind the variable is that if a firm can increase its debt at a competitive cost,
7
We have carried out robustness checks to test whether these extreme values of the variable condition the results obtained.
8
Like other variables used in the literature, such as interest expense as a percentage of operating margin (financial vulnerability), size, credit ratings, pay-out
ratio, etc.
9
The Pál and Ferrando (2010) approach has the advantage that it can be implemented with the information available in the SABI database that we use for the
Spanish case (SABI) which contains balance sheet and income statement information for a large number of companies. Other approaches are much more
demanding in terms of information required, such as Kaplan and Zingales (1997) or Whited and Wu (2006). In the case of Kaplan and Zingales (1997), their
approach additionally requires estimating Tobin’s q, an approach widely criticized for possible measurement errors. As for Whited and Wu (2006), they
construct an index of financial constraints based on a structural intertemporal investment model augmented to account for financial frictions. This approach
has the advantage of avoiding the measurement-error problem of Tobin’s q, but calls for a wealth of information that is not available in our database (such as
dividends paid by the company). Given that most firms in our sample are micro firms or unlisted SMEs, we cannot calculate the two alternatives measures
proposed by Kaplan and Zingales (1997) and Whited and Wu (2006) as they require information on dividends or market data.
6
it is not financially constrained; but if it either does not borrow funds (issuing debt and/or new shares) or else pays above the
market cost of borrowing, then it is financially constrained.
The indicator combines information from several variables to identify three levels of financial constraint: unconstrained
firms, relatively constrained firms and absolutely constrained firms. Specifically, the variables are: investment, financing gap
(difference between investment and cash flow), change in debt, change in equity (issue of new shares), and cost of financing
in relation to the average cost in the market. The financing gap captures the fact that if a firm has a positive gap (i.e., invests
more than its cash flow), it will need external financing. A firm is financially unconstrained if it obtains financing on favor-
able terms, thus increasing its debt at the market price. Conversely, if a firm is able to obtain financing but only at high rates,
then it is relatively constrained. If a firm has a positive financing gap but does not issue debt or raise capital, it will be
because it invests more than its cash flow but at the cost of liquidating assets or consuming savings (reduction of debt or
equity), which means it is financially constrained. A firm is absolutely constrained if it cannot obtain external finance (by
issuing debt and/or new shares). The advantage of this indicator over others used in the literature (such as level of indebt-
edness) is that it takes several financial characteristics of firms into account, whereas the other indicators are constructed
using a single variable. Consequently, this allows us to distinguish between different levels of financial constraint. Table 2
summarizes the criteria used to create the three dummy variables that will be used in the estimations in the next section.
To approximate whether a firm obtains financing at below market cost, we take the average debt service cost as a reference
and compare it with the average for each sector.
Table 3 shows the percentage distribution of the sample of firms across the three levels of financial constraint, both for
the study period as a whole and for the crisis and recovery subperiods. For the whole period, absolutely constrained firms
make up 22.2% of the total, relatively constrained firms account for 47.6%, and unconstrained firms, the remaining 30.2%. By
subperiods, financial constraint reached a peak in the crisis years, when 71% of the Spanish firms in the sample were con-
strained (either absolutely or relatively). The situation improves in the recovery years, as the share of absolutely constrained
firms drops to 21.1%, the relatively constrained firms’ share falls to 46.6% and the unconstrained firms’ share increases to
32.3%. These percentages are quite enlightening because despite the strong performance of the Spanish economy, with vig-
orous GDP growth between 2014 and 2016, and despite a thorough clean-up of the financial sector, there is still a very sig-
nificant percentage (67.7%) of firms experiencing some degree of financial constraint.
Analyzing the investment rate in terms of the levels of financial constraint, Fig. 3 shows that being financially constrained
makes a clear difference to firms’ investment rates, compared to being unconstrained. Regardless of the subperiod, the
investment rate of the unconstrained firms is above 9.7% (9.7% in the crisis and 12% in the recovery years), whereas the firms
with some degree of financial constraint have consistently negative net investment rates (i.e., their gross investment over the
period was insufficient to cover depreciation). Moreover, the investment rate of the absolutely constrained firms is about 4
percentage points (pp) lower than that of the relatively constrained firms. Consequently, these data show how firms’ ability
to take advantage of investment opportunities may be affected by the financial constraints they face.
4. Econometric model of the determinants of investment: Results
We now test the main hypotheses put forward in the previous sections: a negative effect of the degree of finan-
cial constraint on investment, and a non-linear effect of indebtedness on investment. To analyze the possible non-
linear relationship between indebtedness and the investment rate, we use the methodological approach of Gebauer
et al. (2018), which consists of endogenously identifying the threshold level of indebtedness that splits the sample
into two regimes for which the linear relationship between the two variables analyzed may differ. This is done by
estimating a regression model following Hansen (1999, 2000). The intuition of this approach is to assign values to
the regime-separating threshold, so that regressions are estimated until the threshold that maximizes the R-squared
(best fit) is identified. In other words, the debt threshold is not imposed a priori; instead, the parameter that pro-
vides the best fit for the equation is found through an iterative process. Specifically, we estimate the following two
models for different values of the debt threshold, which is a function of the percentile of leverage:
Iit ¼ b1 Lev erageit1 FðLev erageit1

cÞ þ b2 Lev erageit FðLev erageit1 > cÞ þ dzit1 þ k1 Relativ ely constrainedit þk2 Absolutely constrainedit
þ h1 Lassetsit þ lit þ dit þ piS þ eit ð1Þ
where c is the threshold that separates the two regimes in both equations. The impact of leverage on investment is repre-
sented by the b parameters, which differ in the two regimes: parameter b1 measures the effect of leverage on the investment
rate in the first regime (i.e., for lower levels of indebtedness), while parameter b2 measures the effect of leverage on the invest-
ment rate when debt holdings exceed the threshold; zit1 is a vector that contains the values of the variables, defined in the
previous section, that are used in the literature on the determinants of the investment rate. Specifically, this vector contains:
the real growth of sales (Sales growth), the return on assets (ROA) and the interest coverage ratio (ICR). It is assumed that all
these variables affect the investment rate not in the current period but in future periods, which is why they are lagged one
period (t-1). We also include the degree of financial constraint facing the firm, as defined in the previous section. Two dummy
variables—relatively constrained and absolutely constrained—are included for that purpose, with unconstrained firms being
7
Table 2
Criteria used to classify firms by degree of credit constraint according to Pál and Ferrando (2010). Source: Pál and Ferrando (2010).
Investment Financing gap Change in debt Issue of shares Cost of funding

Unconstrained 0 <0 0
0 0 >0 Average rate
Relatively constrained 0 <0 <0
0 0 >0 Average rate
0 0 0 >0
<0 >0
Absolutely constrained 0 0 0 0
<0 0
Table 3
Percentage of firms by degree of credit constraint. Source: Bureau van Dijk and own elaboration.
No restricted Relatively restricted Absolutely restricted

2008–2016 30.2% 47.6% 22.2%
2008–2013 29.1% 48.2% 22.8%
2014–2016 32.3% 46.6% 21.1%
Note: to classify firms by degree of credit constraint we followed Pál and Ferrando’s (2010) characterization.
Fig. 3. Net investment rate and degree of credit constraint. Source: Bureau van Dijk and authors’ calculations.
the reference category. Additionally, firm size (defined as the natural logarithm of total assets) is included to test for the effect
size has on corporate investment (Lassetsit). Given the availability of panel data, the estimation includes firm (lit) and time
fixed (dit) effects. Furthermore, a sectoral dummy (pis) is included to capture possible differences between industries.
To address the possible endogeneity problems that may arise due to investment and indebtedness decisions being taken
simultaneously, in addition to considering the determinants of investment rate with one period lagged, Eq. (1) is estimated
by means of the two-stage least squares procedure used by Gebauer et al. (2018). In the first stage, leverage is modeled as a
function of both of its one-year-lagged values and of the financial characteristics of the companies at the current moment.
Specifically, following the previous literature (Rajan and Zingales, 1995; Coricelli et al., 2012; Aybar-Arias et al., 2012; ECB,
2013; Ferrando et al., 2017; Gebauer et al., 2018) these factors are: the growth of sales (Sales growth), profitability (ROA), the
liquidity ratio defined as the ratio of cash holdings to total assets (Liquidity), size measured as log of assets (Lassets), the total
factor productivity developments, TFP (Productivity) and GDP growth. The degree of financial constraint facing companies is
also considered, as defined in the previous section (Relatively constrained and Absolutely constrained). As the model of the
leverage includes the lagged dependent variable, we carried out the estimation following the dynamic panel system gener-
alized method of moments (GMM) proposed by Arellano and Bover (1995).10 In the second stage the Eq. (1) is estimated with
the predicted debt values obtained from this model as the instrument of debt instead of the actual debt levels.
Table 4 reports the results of the estimation of Eq. (1) for the whole period (2008–2016) and for the periods of financial
crisis (2008–2013) and recovery (2014–2016). Specifically, Panel A of Table 4 shows the results of Eq. (1) in which the degree
10
The results of this auxiliary regression of equation are available upon request from the authors.
8
of financial constraint is considered. The relationship between the investment rate and indebtedness is indeed non-linear,
which implies that there is a different regime of influence for the period as a whole and for each crisis subperiod. Over
the period as a whole, the leverage regime switch occurs from the 73th percentile of the distribution of firms by debt ratio,
which corresponds to a ratio of interest-bearing debt to assets of 52.8%. Up to that threshold, debt has a negative effect, so
that an increase of one percentage point in leverage reduces investment by 0.018 percentage points. Above 52.8% of debt
level (73th percentile of the sample), however, the negative effect of debt on investment accelerates, as a one percentage
point increase in leverage reduces investment by 0.12 percentage points. During the crisis period, the regime switching
threshold, set at a very similar debt ratio around 53% (73th percentile), switching from one regime to another changes
the negative effect from 0.04 percentage points to 0.13 percentage points (0.09 pp). However, during the recovery period,
the negative impact is the same for all the levels of indebtedness, i.e. it is linear, as we cannot reject the null hypothesis that
the coefficient of the regime switching threshold is not significant. In particular, during the recovery period, a one percentage
point increase in leverage reduces investment by 0.16 percentage points for all levels of indebtedness. This result may indi-
cate that during the recovery period the relationship between debt and investment is negative and increasing with debt
levels: the higher the debt, the higher the reduction in the investment rate.
At the same time, the results of Panel A in Table 4 show the importance of the degree of financial constraint as a deter-
minant of investment, as they measure different aspects from those captured by the level of indebtedness. The coefficients of
the financial constraint variables have the expected negative sign and are statistically significant. Throughout the period,
moving from a financially unconstrained to a relatively constrained situation is associated with a 9.75 pp decrease in the
investment rate, or a 11.74 pp decrease if the firm is absolutely constrained. Therefore, the impact is lower when moving
from a relatively restricted situation to an absolutely restricted one, entailing only a 1.98 pp reduction in the investment rate
(9.75 pp vs. 11.74 pp). During the crisis period, the effect of the financial constraints is somewhat similar to the whole period
as moving from a financially unconstrained to a relatively and absolutely constrained situation is associated with a 7.87 pp
and 9.83 pp decrease in the investment rate, respectively. In contrast, during the recovery period, the negative effect for rel-
atively and absolutely constrained firms is higher (9.84 pp and 12.04 pp, respectively). Therefore, the really important
factor determining the investment decisions is the switch from being financially unconstrained to being constrained (rela-
tively or absolutely constrained) and not only the leverage, in which case, the effect of moving from a relatively constrained
state to an absolutely constrained state is smaller and therefore less important.
Regarding the other factors used in the literature on the determinants of the investment rate, sales growth, profitability,
the interest coverage ratio (IRC) and size also have a positive and statistically significant influence across all periods, confirm-
ing the expected signs.11 This implies that these factors help firms to alleviate the financial frictions by allowing them to gen-
erate internal resources (cash flows) and to meet debt-servicing payments.
Consequently, as one of the two main hypotheses of the paper is that the effect of indebtedness on investment measures
different aspects from that of the firm’s financial constraints, the fact that the degree of financial constraint is statistically
significant does imply that constraints really are a relevant explanatory variable for investment and that they provides addi-
tional information to debt. The question here is the extent to which the effect of debt on investment would have been dif-
ferent if the financial constraints were not included in the regressions. In Table 4 we also show the results of the estimation
of Eq. (1) excluding the variables of financial constraint. In this case, the results confirm the non-linear relationship between
the investment rate and indebtedness for the whole period and during the crisis, but also for the recovery period (around 53%
of the indebtedness ratio, corresponding to the 72th–75th percentiles of the sample). Compared with the results considering
financial constraints, the results now show that debt has a higher negative effect on investment. This higher negative effect is
observed in both coefficients of the variable (below and above the threshold). Specifically, for the whole period, up to the
73th percentile of the sample debt has a higher negative effect on the investment rate as an increase of one percentage point
in leverage reduces investment by 0.15 percentage points, i.e. a coefficient ten times higher that when the financial con-
straints is included (0.01). Likewise, the threshold in which the negative effect of debt on investment accelerates is 52.8%
debt level––73th percentile of the sample––similar to before. If financial constraints are not included, debt reduces invest-
ment by 0.23 percentage points once the threshold is exceeded (0.12 considering financial constraints, eq.1). By subperiods,
the debt ratio switching threshold is very similar at around 53% (72th–75th percentile). Additionally, the impact is also
greater in comparison to the situation when the financial constraints are not included.
Therefore, these results point to the relevance of considering not only indebtedness but also a direct indicator of the firm’s
financial constraints for its investment decisions because they measure different issues. In fact, for the whole period and the
two subperiods (crisis and recovery periods), the negative effect of indebtedness on investment is significantly reduced in
both regimes––up to and above the threshold––suggesting that the degree of financial constraint captures different aspects
from those captured by the level of indebtedness. It is likely that the effect of the financial constraints is more related to the
restrictions financial markets impose on firms when they are willing to invest, and the effect of debt reflects the financial
condition of the firm that reduces or increases the probability of their investing given the debt burden they already have.
11
As noted in Table 1, the ICR showed large extreme values for the whole sample. As a robustness check, we re-estimated the models excluding the IRC for the
whole, crisis and recovery periods. The results are robust to those presented in Table 4, both in terms of the coefficients estimated and the points in which the
leverage regimen switch.
9
Table 4
Determinants of net investment rate. Non-linear effect of indebtedness: Considering and excluding the degree of financial constraint.
Considering financian constraints Excluding financian constraints

All period Crisis Recovery All period Crisis Recovery
Leverage_1 1.863** 4.783*** 0.108 10.873*** 15.829*** 15.458***
Leverage_2 12.38*** 13.865*** 16.061*** 23.237*** 26.801*** 34.095***
Sales_growth 1.72*** 1.212*** 0.711 2.816*** 2.426*** 2.463***
ROA 6.476*** 4.477*** 13.664*** 2.724*** 0.826 10.061***
ICR 0.01*** 0.013*** 0.011*** 0.011*** 0.014 0.012***
Relatively restricted 9.756*** 7.876*** 9.849*** – – –
Absolutly restricted 11.742 9.837*** 12.04*** – – –
Lassets 22.59*** 23.309*** 39.309 27.856*** 28.7*** 48.358***
Year FE YES YES YES YES YES YES
Sector FE YES YES YES YES YES YES
Firm FE YES YES YES YES YES YES
Obs. 409,300 229,460 179,840 409,300 229,460 179,840
R2_o 0.021 0.022 0.014 0.014 0.017 0.011
Percentile 73 72 75 73 73 73
Leverage turning point 52.8% 53.0% 53.1% 52.8% 53.0% 53.1%
Number of firms 114,512 91,044 80,535 114,512 91,044 80,535
Results of the estimation of the model of the non-linear effect of indebtedness by period (whole period, crisis period and recovery period) considering and
excluding the degree of financial constraint. The dependent variable, net investment, is defined as the annual percentage change in tangible fixed assets.
Leverage_1 measures the effect of leverage on the investment rate in the first regime (i.e., for lower levels of indebtedness), while Leverage_2 measures the
effect of leverage on the investment rate when debt holdings exceed the threshold. All estimates include firm, time and sector fixed effects.*** Significant at
1%, ** Significant at 5% and * Significant at 10%.
4.1. Economic impact
The results thus far provide evidence of the influence that the degree of financial constraint, the non-linear effect of
indebtedness and other firm characteristics have on firms’ investment rates. However, the estimated parameters merely
reflect the sign of the influence, whether the influence is statistically significant in explaining differences in firms’ invest-
ment rates, and the marginal effect of each variable. It is therefore of interest to quantify the magnitude of the influence (eco-
nomic impact) of these variables, taking the sample variation and the evolution of each variable into account.
Accordingly, Tables 6 and 7 show the economic impact of each explanatory variable associated with: 1) moving from a
value in the 25th percentile of the distribution of that variable to a value in the 75th percentile, and 2) the changes in the
average values at the beginning and the end of each period analyzed. In the case of the interquartile variation, given the non-
linear relationship the economic effect of indebtedness is calculated taking into account whether moving from the 25th to
the 75th percentile of the distribution and the changes in each period is associated with exceeding the regime switching
threshold or not, as the parameter estimated in Table 4, and therefore the impact, differs depending on the regime. If the
threshold is below the 75th percentile, the impact of these changes is calculated using only the parameter associated with
the first regime, whereas if the change exceeds the threshold, the impact depends on the estimated parameters associated
with both regimes obtained from the estimation of Eq. (1). Lastly, in the case of the dummy variables (financial constraint),
the directly estimated parameter directly reflects the expected value of the change in the investment rate on moving from
category 0 to 1. That is, the change in the investment rate on moving from an unconstrained to a relatively or absolutely
constrained state.
Table 6 shows that the variable with the greatest effect on investment rate is firm size and thus, the scale of business. As
previous studies (Acharya et al., 2018; Brunella et al., 2017; Duchin et al., 2010) have pointed out, small firms are highly
dependent on bank debt and consequently are expected to suffer more during bank crises and economic downturns. It
should also be taken into account that the size distribution of firms in Spain (and in our sample) is highly skewed, with a
large number of microenterprises and small firms (93.3%) and a very modest proportion of medium (5.4%) and large firms
(1.3%). Therefore, moving from the 25th to the 75th percentile implies a huge increase in firm size. More precisely, the stan-
dardized interquartile ratio is almost 700%, which implies that a firm in percentile 75 is seven times larger than one in per-
centile 25.
Debt and financial constraint also stand out among the variables with a higher capacity to explain investment decisions.
As already mentioned, change from an unconstrained to an absolutely constrained state is associated with a decrease of
between 9.8 and 12 percentage points in the investment rate for all three periods. Similarly, going from an unconstrained
to a relatively constrained state is associated with a decrease of around 7.8–9.8 percentage points in the investment rate.
Indebtedness is also relevant in determining the investment rate, although its economic impact depends on whether finan-
cial constraints are considered or not. According to the results in Table 5, when the financial constraints are considered mov-
ing from the 25th to the 75th percentile of the distribution of indebtedness is associated with a decrease in investment over
the whole period, the crisis and the recovery of 6.3, 6.5 and 8.4 percentage points, respectively. By contrast, if the financial
10
Table 5
Relative importance of each determinant of net investment rate for non-linear effect of indebtedness in response to sample variance: considering the degree of
financial constraint and excluding the degree of financial constraint.

Leverage 6.301 6.657 8.422 10.364 11.516 14.901
Sales_growth 0.372 0.274 0.134 0.610 0.548 0.465
ROA 0.485 0.327 1.076 0.204 0.060 0.792
IRC 0.166 0.165 0.249 0.183 0.177 0.271
Relatively restricted 9.756 7.876 9.849 – – –
Absolutly restricted 11.742 9.837 12.040 – – –
Lassets 46.261 47.734 82.051 46.26 58.77 100.94
Obs. 409,300 229,460 179,840 409,300 229,460 179,840
Percentage point change in the net investment rate when each dependent variable changes from the 25th to the 75th percentile.
Table 6
Relative importance of each determinant of net investment rate for non-linear effect of indebtedness in response to changes in the average in each period:
considering the degree of financial constraint and excluding the degree of financial constraint.

Leverage 0.098 0.161 0.002 0.569 0.532 0.289
Sales_growth 0.063 0.021 0.038 0.103 0.042 0.132
ROA 0.086 0.062 0.370 0.036 0.011 0.272
Vulnerability 2.425 0.667 2.103 2.667 0.718 2.294
Relatively restricted 9.756 7.876 9.849 – – –
Absolutly restricted 11.742 9.837 12.040 – – –
Lassets 2.687 4.181 2.374 3.31 5.15 2.92
Obs. 409,300 229,460 179,840 409,300 229,460 179,840
Percentage point change in the net investment rate when each dependent variable changes from the average at the beginning and the end of each period
considered. The economic impact of the independent variables at the beginning and the end of the period is calculated taking as a reference the changes in
average values between the years 2010 and 2016 for the whole period, the changes between 2010 and 2013 for the crisis period, and the changes between
2013 and 2016 for the recovery period.
Table 7
Determinants of net investment rate by Size. Non-linear effect of indebtedness.
SMEs Micro Small Medium Large

Leverage_1 2.21*** 3.938*** 1.75 4.579** 15.536***
Leverage_2 12.697*** 13.732*** 13.13*** 2.907 2.44
Sales_growth 1.733*** 1.79*** 2.175*** 0.464 0.502
ROA 6.469*** 1.983 14.301*** 19.375 8.901
ICR 0.01*** 0.008*** 0.012*** 0.012*** 0.001
Relatively restricted 9.818*** 10.054*** 9.438*** 8.658*** 7.238***
Absolutly restricted 11.784*** 12.049*** 11.175*** 10.104*** 9.01***
Lassets 22.947*** 24.765*** 23.742*** 19.27*** 11***
Year FE YES YES YES YES YES
Sector FE YES YES YES YES YES
Firm FE YES YES YES YES YES
Obs. 401,330 222,993 144,846 33,491 7970
R2_o 0.022 0.025 0.01 0.009 0.002
Percentile 73 70 78 77 58
Leverage turning point 55.1% 55.5% 49.0% 50.7% 52.6%
Number of firms 112,685 66,144 38,766 7775 1827
Results of the estimation of the model that considers the non-linear effect of indebtedness (Eq. (1)) for the whole period depending on firm size. Micro firms
have 10 or fewer employees. Small firms have between 11 and 50 employees. Medium firms are those with 50–250 employees. SMEs includes micro, small
and medium firms. Lastly, large firms are those with more than 250 employees. The dependent variable, net investment, is defined as the annual percentage
change in tangible fixed assets. Leverage_1 measures the effect of leverage on the investment rate in the first regime (i.e., for lower levels of indebtedness),
while Leverage_2 measures the effect of leverage on the investment rate when debt holdings exceed the threshold. All estimates include firm, time and
sector fixed effects.*** Significant at 1%, ** Significant at 5% and * Significant at 10%.
constraints variables are excluded from the regression, Table 5 shows that the negative economic impact of indebtedness
significantly increases for the whole period, the crisis and the recovery periods to 10.36, 11.51 and 14.92, respectively. There-
11
fore, these results confirm, as in Table 4, that the degree of financial constraint captures different aspects from those cap-
tured by the level of indebtedness, and if we omit a direct indicator of the intensity of the credit constraints the effect of
debt on investment may be biased.
The rest of the determinants of the investment rate shown in Tables 5 and 6 are found to have a much lower impact. Look-
ing at the period as a whole, an increase in sales growth from 11.09% (25th percentile) to 10.56% (75th percentile) is asso-
ciated with an increase in the investment rate of only 0.37 pp when the financial constraints are considered and 0.61 pp
when they are excluded. Likewise, an increase in profitability from 2.43% (25th percentile) to 9.92% (75th percentile)
involves an increase of only 0.48 pp when the financial constraints are considered and 0.2 pp when they are excluded. This
effect is even smaller in the case of the interest coverage ratio: moving from the 25th to the 75th percentile of the distribu-
tion of indebtedness is associated with a decrease over the whole period considering and excluding financial constraints of
0.16 and 0.18 pp, respectively.
Table 6 shows the economic impact of the independent variables comparing their average values at the beginning and the
end of the period. In general, these variations are smaller than those assumed in Table 5, and therefore the impacts are also of
a lower magnitude. The variables with a higher impact on investment, by and large, are those that measure the intensity of
firms’ credit constraints. Firm size is less important than in the previous table but it still remains the second most important
determinant of the investment rate in the years 2010 and 2016.12 However, the sign of the impact of size on investment is
different depending on the period. Given that during the crisis the average firm size fell in Spain, and therefore, given the pos-
itive value of the coefficient, this implied a reduction in the investment rate, whereas during the recovery size increased and,
thus, it had a positive impact on the investment rate. Interestingly, like size, the ICR has an influence on the investment rate for
the whole period, although this effect is driven by the recovery years. This implies that in the recovery period, those firms char-
acterized by a strong financial position (a high interest coverage ratio) significantly increased their investment rate. Finally, the
deleveraging process in Spain since the beginning of the financial crisis had, in average terms, a reduced impact on the invest-
ment rates once the financial constraints are controlled for. If the intensity of the credit constraints had not been considered,
debt would have a much higher impact. Therefore, this result implies that what really matters for investment is the intensity of
the credit constraints. Debt is also important, but to a lesser extent.
5. Robustness tests
The theoretical literature and empirical evidence confirm the importance of size in analyzing the impact of the different
determinants of investment. For example, factors such as the greater internationalization of large companies, the importance
of technological activities in large corporations (which requires greater investments in R&D departments), better access to
financing in markets as firm size increases, etc., explain the different patterns of investment depending on firm size and the
degree of response of the investment to its determining factors. For this reason, it is interesting to estimate Eq. (1), which
considered the financial constraints, separately for each group of companies based on their size (micro, small, medium,
SME and large).
Table 7 shows that in general the results hold as far as the sign of the variables is concerned, although there are some
features that should be noted: 1) the magnitude of the coefficients that accompany the leverage decreases as firm size
increases: even in large companies an increase in leverage affects investment positively and this effect is the same for all
the levels of indebtedness, i.e. no threshold is found and therefore the effect is linear; 2) the effect of profitability, net sales
growth and interest coverage ratio grows with size, although they are not significant for large firms; 3) the degree of finan-
cial restriction is important regardless of business size, but its impact on the investment rate is significantly lower in large
companies. Therefore, these results show that the investment in SMEs, particularly small and microenterprises, is more sen-
sitive to high levels of debt as they may lack the resources and reputation to access to the credit market (price and quantity)
and to alternative sources of finance (e.g., bond and equity markets). In fact, for large companies the fall in investment rate is
only caused by financial constraints and not by their indebtedness or other factors.
If we analyze the determinants of the investment rate by large sectors of activity, Table 8 shows that the effect of indebt-
edness on investment rate is linear, i.e. there is no threshold for manufacturing and construction (including the real estate
sector), while in the services sector it is non-linear. Specifically, in the manufacturing and construction sectors a one percent-
age point increase in leverage reduces investment by 0.11 and 0.09 percentage points for all levels of indebtedness, respec-
tively. However, for the services sector, which constitutes the largest industry in the sample (57% of total firms), exceeding
the threshold (52.3% of interest-bearing debt to assets corresponding to the 72th percentile of the sample) accentuates the
negative effect from 0.03 percentage points to 0.13 pp (a rise of 0.1 pp). A comparison of these results reveals that in the
services sector, up to its threshold the negative effect of indebtedness (0.03) is significantly lower than in the manufactur-
ing (0.11) and construction (0.09) sectors, but above it the negative effect (0.13) is higher for highly-leveraged
companies.
12
To calculate the economic impact of the independent variables at the beginning and the end of the period, we take as a reference for the whole period the
changes from the years 2010 and 2016 in the bank’s average values, in the crisis period the changes between 2010 and 2013, and in the recovery period the
changes between 2013 and 2016.
12
Table 8
Determinants of net investment rate by sector (manufacturing, construction/real estate and services excluding supplies). Non-linear effect of indebtedness.
Manufacturing Construction/Real state Services

Leverage_1 1.00 0.558 3.027***
Leverage_2 11.479*** 9.207*** 13.487***
Sales_growth 2.223*** 1.359*** 1.42***
ROA 9.678*** 7.659*** 4.59***
ICR 0.011*** 0.003 0.01***
Relatively restricted 9.632*** 8.331*** 10.175***
Absolutly restricted 11.205*** 11.743*** 11.905***
Lassets 25.562*** 12.095*** 24.365***
Year FE YES YES YES
Sector FE YES YES YES
Firm FE YES YES YES
Obs. 107,560 65,204 232,928
R2_o 0.02 0.03 0.02
Percentile 75 73 72
Leverage turning point 53.5% 53.3% 52.3%
Number of firms 26,909 20,564 66,050
Results of the estimation of the model that considers the non-linear effect of indebtedness (Eq. (1)) for whole period according to sector: manufacturing,
construction/real estate and services excluding supplies. The dependent variable, net investment, is defined as the annual percentage change in tangible
fixed assets. Leverage_1 measures the effect of leverage on the investment rate in the first regime (i.e., for lower levels of indebtedness), while Leverage_2
measures the effect of leverage on the investment rate when debt holdings exceed the threshold. All estimates include firm, time and sector fixed effects.***
Significant at 1%, ** Significant at 5% and * Significant at 10%.
Table 8 confirms the relevance of the financial constraints as a determinant of investment. In all sectors, moving from a
financially unconstrained state to an absolutely constrained state, ceteris paribus, is associated with an approximate 11 pp
decrease in the investment rate, or around a 9 pp decrease if the firm is relatively constrained. Furthermore, growth sales,
profitability and size have a positive and statistically significant influence on investment in all the sectors, confirming that
these factors allow firms to generate internal cash flows and promote investment. The results corroborate the negative effect
of indebtedness on investment, although in manufacturing and construction the effect is linear.
Another exercise of interest that we carried out (Table 9) was to test for differences in the determinants of the investment
rate when the sample of companies is divided according to three criteria: 1) whether the profit increases or falls; 2) whether
or not the company is at the frontier in terms of total factor productivity (TFP)13; and 3) whether or not the company is an
exporter. In the case of the most productive companies (in the 10% percentile of TFP distribution in each industry), the leverage
has a positive and statistically significant effect in both terms below and above the threshold. This means that up to the 67th
percentile of the sample (41% of leverage) the effect of debt is positive and an increase of one percentage point in leverage
increases investment by 0.13 pp. Above this threshold, the positive effect of debt on the investment rate falls, but remains pos-
itive. Beyond this threshold, a one percentage point increase in leverage increases investment by 0.06 pp. This implies that for
the frontier firms, in terms of efficiency, increasing debt does not harm investment, probably because their productivity ensures
sufficient returns to pay back their debt and it is not a burden at all. As shown in Table 4, moving from a financially uncon-
strained to absolutely constrained situation has the highest effect on investment with a 7.4 pp decrease in the investment rate,
or a 11.9 pp decrease if the firm is absolutely constrained. In the case of exporting companies leverage has a positive and sta-
tistically significant effect up to the threshold (54.3% of debt), after which further debt reduces investment. Similarly, for the
most productive firms the effect of financial constraints is lower than for the overall sample. For the other types of companies
in each of the categories of Table 9 (not the most profitable, non-frontier and non-exporters), results hold from those presented
in Table 5, as the leverage and financial constraints affect negatively and similarly to the investment rate.
The effect of leverage on investment is also non-linear for firms that experienced negative profit. In these firms the
threshold is in the 76th percentile of the sample (debt level of 53.9%), above which the negative impact of leverage in invest-
ment accelerates. By contrast, the effect of debt is negative and linear for firms with positive profits. Lastly, the rest of the
determinants of investment—sales growth, profitability, interest coverage ratio and size—have a positive and significant
effect on the investment rate, confirming the results of Table 5.
Overall, these results confirm the significant and negative effect of financial constraints and the non-linear effect of
indebtedness on corporate investment decisions. Specifically, the results add evidence that above a threshold debt-to-
asset ratio of around 52%, approximately in the 73th percentile of the distribution, the negative impact accelerates, with
indebtedness having a greater negative impact on investment. By contrast, in large, most productive and exporting compa-
nies leverage has a positive effect, although for high levels of indebtedness the positive effect of debt on the investment is
reduced. The results also confirm the relative importance not only of indebtedness but also of access to finance for firms’
13
The TFP compares the value added obtained by a company with the total amount of capital and labour used. This measure of productivity is calculated
following the procedure proposed by Caves et al. (1982) and Hulten and Schwab (1993).
13
Table 9
Determinants of net investment rate by profit growth, top productivity firms and export firms. Non-linear effect of indebtedness.
Profit growth > 0 Profit growth <=0 Top 10 of productivity Non-top 10 of productivity Exporters Non-
exporters
Leverage_1 0.177 3.996*** 12.943*** 5.342*** 2.905* 3.328***
Leverage_2 7.93*** 16.201*** 6.058** 15.287*** 9.028*** 13.186***
Sales_growth 1.991*** 1.617*** 1.3 2.101*** 1.805** 1.658***
ROA 3.89* 7.566*** 8.792** 7.212*** 21.721*** 4.598***
Vulnerability 0.009*** 0.01*** 0.005* 0.011*** 0.014*** 0.009***
Relatively restricted 8.988*** 10.494*** 7.369*** 9.7*** 8.685*** 9.979***
Absolutly restricted 11.294*** 12.215*** 11.977*** 11.5*** 10.546*** 11.921***
Lassets 19.618*** 25.349*** 15.767*** 24.374*** 21.631*** 22.926***
Year FE YES YES YES YES YES YES
Sector FE YES YES YES YES YES YES
Firm FE YES YES YES YES YES YES
Obs. 188,042 221,258 35,638 373,662 71,408 337,827
r2_o 0.021 0.021 0.061 0.019 0.007 0.022
Percentile 71 76 67 72 82 71
Leverage turning point 52.7% 53.9% 41.0% 52.7% 54.3% 52.4%
Number of firms 90,220 99,050 18,556 107,434 18,275 99,985
Results of the estimation of the model that considers the non-linear effect of indebtedness (Eq. (1)) for the whole period and by profit growth, productivity
and export industry. Profit growth is defined as the profitability change between the year (t) and the previous year (t 1). Top productivity firms are those
in the top 10% of the highest productivity firms in each sector and year. Productivity is defined as the total factor productivity developments, TFP. Lastly,
exporter firms are those firms that export products. The dependent variable, net investment, is defined as the annual percentage change in tangible fixed
assets. Leverage_1 measures the effect of leverage on the investment rate in the first regime (i.e., for lower levels of indebtedness), while Leverage_2
measures the effect of leverage on the investment rate when debt holdings exceed the threshold. All estimates include firm, time and sector fixed effects.***
Significant at 1%, ** Significant at 5% and * Significant at 10%.
investment decisions as an increase in the degree of financial constraint is associated with a significant decrease in the
investment rate, compared to unconstrained firms. Likewise, the other investment rate factors related to the firms’ financial
situation (future growth opportunities, profitability and interest coverage ratio) and size present the expected positive and
significant effect.
6. Conclusions
This paper focused on the impact that financial variables, especially over-indebtedness and access to finance, have on firm
investment. We drew on Hansen’s (1999, 2000) and Gebauer’s (2018) procedures, in which different regimes of influence of
indebtedness on investment are detected. Unlike other related studies, this paper contributes to the literature by considering
an indicator of financial constraint based on the relationship of financing needs to (external and internal) sources of funding
and several financial characteristics. This approach allows us to distinguish between different levels of financial constraint.
The study used a panel of more than half a million observations corresponding to over 176,000 Spanish firms for the period
2008–2016. The case of Spain is a good laboratory for analyzing the effects of the degree of financial constraint and excessive
indebtedness on firms’ investment decisions, as the expansion phase prior to the 2008 financial crisis was characterized by
excessive growth of corporate indebtedness (particularly bank credit associated with real estate assets), which once the cri-
sis began forced an intense process of deleveraging (especially in the corporate sector), partly imposed by the financial con-
straints associated with a profound restructuring of the banking sector.
The results confirm the relative importance not only of indebtedness, but also of access to finance for firms’ investment
decisions. In fact, the degree of financial constraint emerges as the main determinant of corporate investment, after firm size,
and with a higher effect than other variables such as sales growth or profitability. Specifically, after controlling for the effect
of the other explanatory variables, the results show that the net investment rate in financially unconstrained firms is more
than 7.8 percentage points higher than in firms with some degree of constraint. Indebtedness has a negative influence on
investment in Spanish firms, but its impact on investment is less than that associated with financial constraint. In addition,
the results confirm that above a threshold debt-to-asset ratio of 53%, approximately in the 72th percentile of the distribution,
the negative impact accelerates, with indebtedness having a greater negative impact on investment. This effect is robust to
the phase of the cycle, regardless of whether the analysis covers the recession years resulting from the 2008 financial crisis or
the subsequent years of recovery, when the Spanish economy returned to its earlier levels of activity. Nonetheless, it should
be highlighted that the negative effect of indebtedness on investment increases and becomes linear after the financial crisis,
suggesting that banks became more risk averse, thus further constraining access to credit.
Another important result is that once financial constraints are included in the analysis, the relevance of debt as a deter-
minant of investment falls considerably, although it is still relevant. This implies that a firm’s debt should not be used to
proxy the financial constraints it is facing, as debt may be measuring other aspects of the firm’s situation.
14
The importance of the degree of financial restriction as a determinant that negatively affects the investment rate is main-
tained when the sample is divided into groups according to size (micro, small, medium, SME and large), whether or not com-
pany profitability is increasing, whether or not they are at the frontier of reference in terms of productivity, and whether or
not they are exporters. The influence of the rest of the determinants of investment is as expected. Higher profitability,
growth of sales and interest coverage ratio are associated with higher levels of investment as they allow firms to generate
internal funds and to meet their debt-servicing payments. Furthermore, firm size has a positive and significant effect on
investment, suggesting that firms react differently to the crisis and financial constraints according to their scale of business.
In this line, peculiarities are found in large, most productive and exporting companies as leverage has a positive effect,
although at high levels of indebtedness this positive effect is lower.
Therefore, these results indicate that Spanish firms are paying a high price for the over-indebtedness acquired in the years
prior to the financial crisis. Added to this over-indebtedness is a tightening of credit conditions, which worsened consider-
ably during the period 2008–2013, in which the economic crisis coincided with a banking crisis that eventually forced Spain
to apply for assistance from European funds. From an economic policy point of view, the results show the importance of
banking regulation in preventing levels of corporate indebtedness that are likely to become a drag on the recovery of invest-
ment. On the other hand, to the extent that indebtedness is negatively related to investment, deleveraging since 2008 has
been working in the opposite direction to financial constraint.
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Contents lists available at ScienceDirect

Journal of International Money and Finance

Effects of the degree of financial constraint and excessive

2. Financing conditions and investment: Related literature

3. Sample and variables used: Descriptive statistics

2008-2016 2008-2013 2014-2016

4. Econometric model of the determinants of investment: Results

Iit ¼ b1 Lev erageit1 FðLev erageit1

Investment Financing gap Change in debt Issue of shares Cost of funding

No restricted Relatively restricted Absolutely restricted

Considering financian constraints Excluding financian constraints

4.1. Economic impact

Considering financian constraints Excluding financian constraints

Considering financian constraints Excluding financian constraints

SMEs Micro Small Medium Large

Manufacturing Construction/Real state Services

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