Firms’ Investments During Two Crises

We study the drivers of investment in Italy during the global financial crisis and the sovereign debt crisis. We focus on the effect of leverage while controlling for the role of other drivers: expected demand, profitability, access to credit and uncertainty. As firm-level leverage may be correlated with its unobservable characteristics, we employ instrumental variables estimation, using the median leverage of firms in the same industry and size decile as an instrument. We find that an increase in leverage equal to the interquartile range (about 30 percentage points) is associated with a lower investment rate of 1.9 and 1.4 percentage points (36 and 41 per cent of its mean) during each crisis. We also find that expected demand growth has a strong positive association with investments, whereas this relation holds for profitability only during the sovereign debt crisis. In contrast, credit rationing and uncertainty have a negative, although more limited, effect. Overall, ex-ante high firm indebtedness has been an important driver of the lower investment rate over the last decade.