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Investment Decisions and Financial Standing of Portuguese Firms – recent evidence

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The analysis of firms’ investment decisions and the firm’s financial standing is particularly relevant under a scenario of (i) the high indebtedness levels of Portuguese firms, (ii) the reduction in profitability of these firms, which reduces the amount of internally available funds thus increasing the demand for external financing, and (iii) the ongoing Financial and Economic Crisis that considerably changed the conditions and access to the credit markets. In this article, yearly balance sheet and financial statements data from the Central Balance Sheet since 2006 until 2011 is used. The results obtained indicate that firms’ financial standing is indeed relevant in explaining corporate investment decisions, where the burden of servicing debt, the cost of capital, and the firm’s indebtedness all have a negative relationship with firm’s investment rate. As for profitability the results suggest a strongly and positive relationship with firms’ investment rate. Nonetheless, these results are predominantly seen for smaller firms where large firms investment rate only seem to be affected by the profitability levels. Moreover, there is evidence suggesting that the impact of firms’ financial standing became more relevant during the period of the sovereign debt crisis in the euro area.
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Economic Studies