Abstract
We explore the increase in the net lending of non-financial corporations across the OECD following the global financial crisis. We document that this rise reflects both increases in saving and declines in investment. Panel regressions reveal that the fall in investment across OECD economies was generally in line with fundamentals—GDP growth, interest rates, and profits—though in some countries the weakness was more pronounced. We find little evidence that firms were reducing investment to strengthen their balance sheets, as payments to shareholders remained strong and were uncorrelated with investment. We conclude that, at least from the investment side, the rise in corporate net lending probably does not reflect a shift in corporate behavior relative to past norms.
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Notes
Cash hoarding may be associated with corporate net lending, either because corporations have increased their saving relative to investment in order to bolster their cash holdings, or merely because corporations are parking their excess saving in liquid assets. But there is no direct relationship between corporate net lending and cash hoarding. For example, if corporations desired to strengthen their liquidity positions, they could issue long-term liabilities and acquire liquid assets, without any change in their net lending positions. By the same token, if corporations boosted their saving relative to investment but used these extra resources to repay debt, this would show up as a rise in net lending but no change in their cash holdings.
The difference between corporate profits and the corporate saving discussed earlier is that corporate saving is defined as profits minus net dividend payments.
Different definitions of cash flow are used in the literature; we use profits after payments of taxes, interest, and rents, because those payments are not controlled by the firm in the short run. For discussions of cash flow and investment, see, among others, Fazzari and others (1988), Hubbard (1998), and Cummins and others (2006).
Buybacks are negative when equity issuance exceeds share repurchases by firms.
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*The authors are Deputy Associate Director and Director of the International Finance Division, Board of Governors of the Federal Reserve System, Washington, DC 20551, U.S.A. They can be reached at joseph.w.gruber@frb.gov and steven.kamin@frb.gov. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. Michael DeDad and Tessa Morrison provided superb research assistance.
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Appendix A: Data Description
Appendix A: Data Description
Country Sample: Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Ireland, Germany, Italy, Japan, Korea, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom, United States.
Data Sources and Descriptions
GDP: Real and nominal GDP are from the OECD Economic Outlook.
GDP and Investment Deflators: From the OECD Economic Outlook with the exception of the U.S. which are taken from the BEA National Accounts. The OECD investment deflators are for Gross Fixed Capital Formation. For the U.S., the investment deflator is for Private Fixed Investment.
Real Capital Stock: From the OECD Economic Outlook.
Investment, Profits, Net Dividends: All data are for the non-financial corporate sector with the exception of Switzerland where the data are for the total corporate sector. Data are from the OECD National Accounts, with the exception of the U.S. and Canada where data are from their respective national Integrated Macroeconomic Accounts.
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Investment is defined as gross fixed capital formation.
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As described in the text, profits are defined as the gross operating surplus less net interest payments, rent, and taxes.
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Net dividends are the distributed payments of corporations plus reinvested earnings on foreign direct investment in the domestic economy less the distributed income of corporations and reinvested earnings of domestic corporations abroad.
Share Buybacks: The negative of the net incurrence of equity liabilities from the OECD National Accounts. Except for the U.S. and Canada, where the data are from national Integrated Macroeconomic Accounts.
Interest Rates: 10-year sovereign bond yields from the OECD Economic Outlook. Except for Estonia where the lending rate as reported in the World Bank World Development Indicators was used.
Depreciation Rate: Productive capital stock scrapping rate as reported in the OECD Economic Outlook.
