Sholomitskaya_Summary_20180823 (1138602), страница 2
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Underinvestment is defined in the academic literature and in this thesis asthe investment decision by the firm, which is under the strong influence offinancial constraints that force it to reject profitable investment opportunities(liquidity constraints, debt overhang). Overinvestment stands for the case when themanagement of a firm carries out inefficient projects, pursuing not the goal of6maximizing the market value of the company, but his own goals (such as thegrowth of assets under management). In addition to the factors of capitalinvestment at the firm level, we study the factors and shocks explaining aggregateinvestment dynamics.Objectives of the research.
The aim of the thesis is to estimate therelationship between financial flows, especially the internal and external debt ofnon-financial corporations, and the real capital accumulation in the Russianeconomy. We explore the factors that determine deviations of corporateinvestments from their optimal value in terms of traditional models, considermechanisms and factors of both underinvestment and overinvestment, and payspecial attention to the role of borrowings: in what way external financing affectsthe accumulation of fixed capital and what kind of restrictions matter.Another purpose of the study is to examine the relationship between realcapital accumulation and investments in acquisitions at the firm level. We questionwhether these two forms of investment are independent from each other, or theyare complementary, or they are substitutes: in other words, if companies face atrade-off between the two forms of investment.
Besides this, we consider the roleof state participation in the designated processes. Our conjecture is that privatecompanies and companies with government participation in their capital havedifferent behavior in terms of financing capital expenditures and spending ofavailable funds.To achieve our goals, the following tasks were accomplished: we examined and analyzed the structure and dynamics of internal andexternal borrowings, together with the dynamics of investments (of variousforms) of non-financial corporations;7 on the basis of investment theories, we identified potential constraints, theirsources and possible investment strategies in terms of attracting and usingborrowed funds; a large database of panel data was collected on which statistical analysis wascarried out and econometric models were tested to test hypotheses; we estimated the macroeconomic model to compare the effects found at themicro level with those observed for the aggregate investment data.Methodology.
The methodological basis is the standard neoclassical modelof investment behavior, the theory of liquidity constraints (investment free cashflow sensitivities), and the “principal-agent” theory in the form of its applicationsto the investment behavior. The analysis is carried out at the micro level using thecompanies’ financial statements and at the macro level using aggregate data.
Weuse comparative analysis and econometric modeling: first, dynamic panel datamodels (for firms), and second, a time series model (vector autoregression) formacroeconomic data.The analysis is carried out at the micro level using the companies’ financialstatements and at the macro level using aggregate data. For the micro level we usecomparative analysis and econometric modeling: dynamic panel data models,estimated with the generalized method of moments (GMM), developed byArellano and Bond (1991). The corresponding database contains more than 100public Russian companies, for the period from 2000 to 2016, and includescorporate financial statements’ indicators (according to international standards),data on the market capitalization of firms and information on state participation incapital (unbalanced panel).
Dynamic panel data models were estimated using thestatistical package EViews9.8For analysis at the macroeconomic level we use a structural vectorautoregressive model with sign restrictions, estimated in Matlab, applying IRISToolbox.Main findings. A number of hypotheses were formulated and tested. Thefirst main hypothesis is that for periods of tightening financial conditions at themacro level financial constraints begin to play an important role, including theproblem of accumulated debt burden (debt overhang), which results inunderinvestment. This hypothesis was formulated regarding the structure ofcompany ownership, and the concomitant conjecture was that the stateparticipation in capital could play an important role in terms of the relevance offinancial constraints.
According to the results of the estimation, the abovehypothesis cannot be rejected for private companies, and for companies with stateparticipation up to 2015 we observed relatively soft budget constraints. After 2015,due to strong external pressure as a result of sanctions by developed countries, thedifferences between private and state-owned companies shrank.The second key hypothesis is that there is a relationship between thecompany investments in fixed assets and its investments in acquisitions of otherfirms. This hypothesis cannot be rejected, and the important result is that financialconstraints play an important role here as well: under soft external financialconditions, companies did not face the trade-off problem, and the relationshipbetween the two forms of investment was positive, while under the tougherconditions the trade-off problem arose.The third hypothesis is to check the existence of the overinvestmentphenomenon in the form of acquisitions of other companies among large Russiancorporations.
Our estimates showed this takes place, and the largest companies inour sample, in the absence of the financial constraints impact, were prone to shifttheir investment strategies in favor of a larger share of M&A transactions. Thus, it9can be stated that some of the companies in our sample were prone to empirebuilding.The fourth main hypothesis was that the effects found at the microeconomiclevel should be observed at the level of the economy as a whole, at least to someextent. The structural vector autoregressive model, which allowed us to decomposethe dynamics of aggregate investment, demonstrated that external loanssubstantially contributed to changes in the aggregate investment, and the sign ofthis contribution was the same as we estimated it with the analysis at the firm level:until 2007 it was positive, and in the post-crisis period, after 2011 – mostlynegative.Borrowings of Russian corporations, on the one hand, supported the realcapital accumulation but, on the other hand, they subsequently constrained it, andthe structure of borrowings is important in two aspects.
The first aspect is thestructure from the point of view of the source: as it turned out, external debt plays amore significant role, because through it external shocks are transmitted to thenational economy. The second is the structure from the point of view of theborrower: we have identified differences in the behavior of private companies andcompanies with government participation in the capital. The latter were to a muchlesser extent influenced by financial constraints, which at the same timediscouraged the investment of private companies, so we can conclude that fordifferentgroupsofcompaniesinsomeperiodsunderinvestmentandoverinvestment took place, and these periods could overlap (in 2009-2014):underinvestment took place for private companies, and overinvestment in the formof acquisitions – for large companies with state participation.Contribution of the work is, first, the approach that considers in oneframework investments in fixed assets and investments in acquisitions, while thelatter are not treated as separate transactions, as it is usually done in the researches,10but, similarly to the capital accumulation, as a single stream of funds spent by thecompany to all of its acquisitions.
To study Russian investments, this approach isapplied for the first time, and its relevance is proved in the thesis, since it isdemonstrated that at the firm level the decisions about investments in these twotypes of assets are interrelated.Second, our research reveals the mechanisms and factors of investmentbehavior of the Russian non-financial corporations, especially the features of theinvestment strategies of large corporations (the appetite to empire-building) andthe respective changes in financing strategies.
Thus, a contribution is made to thestudies on the transformation of financial capital into real capital at the firm level.There were not many attempts to estimate investment functions for a largesample of Russian companies for a long period of time, and in this regard, ourresearch contributes. We identified and analyzed not only key investment factors,but also the change in their influence over time, which turned out to be especiallyimportant. Thus, the paper presents a set of results that are confirmed empiricallywith the involvement of a large-scale database.An important aspect of our work is assessing the consequences ofgovernment participation in the company's capital, therefore we contribute to theliterature on the role of the state in the economy, since we demonstrate differencesin the investment behavior of companies depending on the structure of theirownership.
It is shown that the existence of an empire-building strategy among thelargest Russian companies with state participation and simultaneous existence ofan underinvestment problem for private companies could lead to crowding-out ofinvestments of the latter by the investments of the former under limited financialresources conditions. The result is new for understanding how active participationof the state in the corporate sector of the economy impacts the efficiency ofresource allocation.11Theoretical implications of the research is, first, that our estimates haveshown the relevance of consideration of various forms of investment (fixed assetsinvestment and acquisitions) in one context. This approach creates basis for futureresearch of the firm's investment strategies.
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