Investment of firms in Brazil : do financial restrictions, unexpected monetary shocks and BNDES play important roles

Abstract

Our objective in this paper is to estimate the dynamics of firm investment in Brazil. For this purpose, we built an original database with confidential and public data containing balance sheet and financial information of 4,876 public and private firms from 1995 to 2010. We then classify these firms as financially restricted or not. Our results show that the effects of unexpected monetary shocks and financial restrictions over investment are economic and statistically significant in Brazil. Unexpected monetary contractions and financial restrictions decrease investment, while unexpected monetary expansions increase investment. We also find strong empirical evidence that financing from BNDES, Brazil’s development bank, affects positively the dynamics of investment and that this effect is economic and statistically significant. Our results are robust to several model specifications and econometric techniques.