Financialization, financial assets and productive investment in Latin America: evidence from large public listed companies 1995–2015

Abstract

Using firm-level data from public listed large non-financial corporations (NFC) this paper studies the impact of financialization on productive investment in Latin America in the last two decades. After considering the main stylized facts on investment, profits and financial incomes from balance sheet information, we estimate an econometric model of investment determinants to measure the impact of financialization over large NFC. Similar to developed economies, evidence suggest that dividends payments and financial income has negative affect investment. But, in Latin America, restricted only for large and very large firms. Besides this, we also registered that non-current financial assets holding negatively affects productive investment. This seems to be especially relevant in the context of the carry trade boom in the region after 2009. These findings provide new insights on the negative effects of the international dimension of financialization on emerging countries productive investment.

Keywords:

• Financialization
• Latin America
• productive investment

JEL CLASSIFICATION:

• O16
• C58
• G31

Notes

Acknowledgement

The authors would like to thank the anonymous referee, Roberto Lampa, Pablo Bortz, Jorge Carrera, Fernando Toledo, Monika Miereless, Marcia Solorza, Rodigo Perez Artica and Joel Rabinovich for their comments and suggestions at different seminars and economist meetings during past years that largely helped to narrow and improved this research. All remaining errors are the sole responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Some complementary methodological aspects, the complete details of the variables used and other relevant information on the sample will be presented in Appendix A.

2 Note that if FDI is not decomposed into equity and intercompany loans, balance of payment data would incorrectly show FDI as long-term and stable source of finance, but a part of it should correspond to speculative and short-term.

3 The large volume of information allows the econometric estimation of investment determinants using the Method of Generalized Moments (MGM) in panel data as well as study possible endogeneity problems related to Nikel Bias.

4 The sample does not include information about Uruguay. This is because in the Uruguay Stock Exchange only 7 companies are listed. To see the complete list of countries with coverage in the database, see “Worldscope country coverage” available at: https://blogs.cul.columbia.edu/business/files/2014/02/Worldscope-Coverage-Summary.pdf

5 Understanding NFCs as all those companies that are not linked to finance and insurance activities such as savings institutions, banks, credit brokers, investment banks, stockbrokers, life insurance, medical, insurance work risks, payday loans and others, listed in items 60, 61, 62, 63, 64 and 67 of the double-digit SIC classification.

6 Following Karwowski (2018), the differentiation of sources and applications of financial flows is key to the study of the financialization of NFCs. Given an increase in profits, a company may decide to distribute dividends, invest more, retain earnings as internal liquidity (cash and short-term investment) or reduce liabilities. By using this approach we can guarantee to be under a Stock Flow Consistent approach, by witch, every income has its real or financial counterpart,

7 Manufacturing firms corresponds to SIC code 2011 to 3965, public services and transportation are SIC code 4011 to 4953, trade services: SIC code 2711 to 2759, 5013 to 5999, 7011 to 9511; construction: SIC code 1521 to 1794 and 6512, 6513, 6519, 6531, 6552.

8 When measuring the ratio of financial benefits to operating profits based on tax information for the US, Krippner identifies that for the 2000s in the US the ratio is “between three and five times the average levels of the 1950s and 1960s” (Krippner 2005, 188).

9 Cash is demand deposits (cash, checking account, T + 1 funds); Current financial assets are: “Short-term investments” (special cash deposits, mutual funds in cash, T + 1 temporary funds) + “other current financial assets” (fixed term investments, treasury securities, checks and deposits on account of third parties); Other non-current investments are: company shares (except for shares in consolidated subsidiaries), long-term public and private securities, investment funds and other long-term financial investments (see more details in Appendix A).

10 In the case of debt, and from a theoretical point of view, the negative relationship between debt and investment is not straightforward. In most cases we can say it has a non linear relationship. On the one hand, high leverage in the past do not always imply less investment in the future. For example, high indebted companies could have a large business in their hands and, for this, expected large future cash flow. But, on the other, large debt could also represent difficulties to access to new loans and loose of managerial autonomy to pursue new investment. For this group of firms, empirical evidence shows that this second option could excess the first one. Ndikumana (1999) and Tori and Onaran (2022) shows similar results.

11 Something similar has been suggested in other works for the region such as Torija Zane and Gottschalk (2018) and Miotti (2018).

Additional information

Notes on contributors

Nicolas Hernán Zeolla

Nicolas Hernán Zeolla is a full researcher at the Foundation Research for Development (FIDE), National University of Quilmes (UNQ), Bernal, Argentina.

Juan E. Santarcángelo

Juan E. Santarcángelo is a full researcher at the National Scientific and Technical Research Council (CONICET), National University of Quilmes (UNQ), Bernal, Argentina.