Financial constraints for investment in Brazil

Vicente Lima Crisóstomo (Depto Ciências Contábeis, Universidade Federal do Ceará, Fortaleza, Brazil)
Félix Javier López Iturriaga (Depto Economía Financiera y Contabilidad, Universidad de Valladolid, Valladolid, Spain)
Eleuterio Vallelado González (Depto Economía Financiera y Contabilidad, Universidad de Valladolid, Valladolid, Spain)

International Journal of Managerial Finance

ISSN: 1743-9132

Publication date: 28 January 2014



The purpose of this paper is to verify the existence of financial constraints for investment in Brazil, an emerging market with growing international visibility.


Using panel data methodology and generalized method of moments (GMM), the paper estimates dynamic investment models based on the Euler equation and Tobin's q for a panel data set of 199 Brazilian non-financial firms for the time period 1995-2006.


Results show that Brazilian firms face financial constraints since their investments depend on internally generated funds. Results are robust to different investment models based on the Euler equation, also controlling for growth opportunities. Significant investment-cash flow sensitivity has been found for the whole sample of firms. Subsamples of firms considered as under financial constraints, according to dividend payout and equity issuance policies, have higher investment-cash flow sensitivity. Investment-cash flow sensitivity of financially constrained firms in Brazil is higher than that in the UK and in Romania, a transition economy.


The results extend empirical evidence of financial constraints in Brazil. The paper contributes to the literature by assessing the firms’ financial constraint status on an annual basis, and by using panel data methodology and GMM to estimate dynamic models of investment that take into account the proposals of the hierarchy of finance theory. In addition, the paper controls for growth opportunities. Capital market imperfections affect firm investment in Brazil and such effects are even stronger for financially constrained firms.



Lima Crisóstomo, V., Javier López Iturriaga, F. and Vallelado González, E. (2014), "Financial constraints for investment in Brazil", International Journal of Managerial Finance, Vol. 10 No. 1, pp. 73-92.

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