glucokinase inhibitor Methodologically we follow the existin

Methodologically, we follow the existing literature, as there is a potential endogeneity between cash-flow and investment, adopting a system GMM approach proposed by Arellano and Bover (1995) and Blundell and Bond (1998). In this glucokinase inhibitor case, the lagged explanatory-variables instruments allow us to identify the importance of cash-flows on investment decisions. Despite heterogeneity in our sample, the presence of non-listed firms imposes some difficulties, as regards to the controls utilized in the estimations. In particular, Tobin’s Q may not be used as a proxy for investment opportunities. This problem is circumvented by using multiple alternative proxies. For instance, we consider variation of sales at firm level and sector variation in investment and in value added at an aggregate level in order to control for investment opportunities. Our main results indicate that Brazilian firms were credit constrained in recent years (2008–2010). Cash flow coefficient is indeed larger than what is usually obtained in the literature for other countries, such as Carpenter and Guariglia (2008), suggesting a higher degree of imperfections in the Brazilian credit market. Furthermore, this coefficient changes when firms are classified according to the three categories that may properly approximate the degree of credit constraint: size, listed on stock markets and the export’s sales level. In the first case, Brazilian firms are classified as small, middle and large considering the number of employees. Although previous evidence that analyze the impact of size on credit restrictions has been mixed in Brazil, as observed in Terra (2003) and Aldrighi and Bisinha (2010), our results are in line with the traditional literature: cash flow coefficient is insignificant or at least (depending on the econometric specification) has a lower elasticity magnitude for larger firms. In order to perform our investigation, this paper is structured in 5 sections apart from this introduction. Section 2 provides a brief survey of the literature. Section 3 presents methodology to analyze credit restriction. Data description is presented in Section 4 as well as some descriptive statistics on the main variables. Next, we present and discuss our results, followed by robustness outcomes. Last section concludes.
Relation to the literature and the Brazilian context In a world of perfect capital markets, without transaction costs and taxes, the Modigliani–Miller Theorem asserts that financial structure of firms is irrelevant for their real decisions, in particular investments. But in reality all these assumptions are non-valid, and a special focus of the literature has been on the case of asymmetric information. The asymmetries in financial markets may be due to differential information about types, where borrowers have more information about their projects’ risks or managerial abilities than creditors, or due to difficult verifiability of actions, where creditors cannot observe investment choices or the real capacity of repayment from borrowers. The main consequence is a gap between the internal (for example, retained profits) and external (for example, bank credit) cost of funds, explained by the creditor’s need to raise funds to compensate risk of bad quality borrowers (the adverse selection problem) or costly monitoring (the moral hazard problem) (Stiglitz and Weiss, 1981). The seminal researchers testing these hypotheses were Fazzari et al. (1988). They split a sample of US firms into three categories regarding dividend payments, high, medium and low, and showed that the relation between cash flows and investments was significantly higher in the last group, which corroborates the hypothesis when one assumes that these kinds of firms are more likely to suffer credit restrictions. Concerning the first problem, the initial proxy used for controlling investment opportunities, Tobin’s Q, was criticized because what can be constructed using real data (mean Q) is equivalent to what in theory reflects investments opportunities (marginal Q) only under strong assumptions. Moreover, Tobin’s Q, as the ratio between firm market value and recomposition cost of capital, only reflects investment opportunities from an outside point of view, which may not properly capture real opportunities under imperfect capital markets (Carpenter and Guariglia, 2008). Besides, this proxy is simply absent when one analyzes data with non-traded firms (Baun et al., 2011; Guariglia et al., 2011).