Econintersect: An excellent empirical analysis has been published by J.W. Mason of the Roosevelt Institute: Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment. The author points out that there has been an assumption widely held that bank failures and insolvency issues had a relationship to the fall in business investment during and following the Great Financial Crisis of 2008. This work shows that the investment behavior was consistent with a long-term trend; that argues against an impact from reduced bank lending. The icing on the cake is the fact that corporate borrowing did not in fact decline; it was investment that declined. The corporate borrowing was done for other reasons than investment.
Here is a graph from the paper:
There are other graphs in the paper that show time variation of correlation over recent decades:
- Firm-Level Investment-Cash Flow Correlation - Declining
- Firm-Level Payout-Borrowing Correlation - Increasing
- Firm-Level Payout-Cash Flow Correlation - Level before 2000, higher since
Econintersect comment: It appears that the objectives of corporations over the years has clearly changed from building for the future to stripping cash out of the concern.
Click on the title page below to read the entire paper:
- Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment. (J.W. Mason, The Roosevelt Institute, 25 February 2015)