No abstract

We thank Hala Moussawi for excellent research assistance. We thank Giovanni Dell'Ariccia and Maria Soledad Martinez Peria for helpful suggestions. The views expressed in this study are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, IMF management, or the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

I study whether firms' reliance on intangible assets is an important determinant of financing constraints. I construct new measures of firm-level physical and intangible assets using accounting information on U.S. public firms. I find that firms with a higher share of intangible assets in total assets start smaller, grow faster, and have higher Tobin's q. Asset tangibility predicts firm dynamics and Tobin's q up to 30 years but has diminishing predicative power. I develop a model of endogenous financial constraints in which firm size and value are limited by the enforceability of financial contracts. Asset tangibility matters because physical and intangible assets differ in their residual value when the contract is repudiated. This mechanism is qualitatively important to explain stylized facts of firm dynamics and Tobin's q.

Fixed investment was the most important contributing factor to the boom-bust cycle in Cyprus over the last decade. Investment boomed during a credit boom in mid-2000s, during which the corporate sector borrowed heavily. Investment collapsed after 2008 when the credit boom ended. Investment and corporate balance sheets further deteriorated during the Cypriot banking crisis over 2012-2014. Using firm-level investment and balance sheet data, we find that corporate indebtedness is negatively associated with investment both before and after the banking crisis, although the effect is weaker after the Cypriot banking crisis, possibily due to the reduced role of credit in driving post-crisis investment and growth. Our results suggest the need torepaire corporate balance sheets to support sustainable invesetment.

We study the forecasting power of financial variables for macroeconomic variables for 62 countries between 1980 and 2013. We find that financial variables such as credit growth, stock prices and house prices have considerable predictive power for macroeconomic variables at one to four quarters horizons. A forecasting model with financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85 percent of our sample countries at the four quarters horizon. We also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.