Financial repression and firm self-financing of investment: empirical evidence from Brazil

Analysis of 86 Brazilian manufacturing firms operating during a period marked by some degree of financial repression demonstrates that investment spending influences the liquid asset holdings of firms. This self-finance motive is weaker than the transactions motive but, in general, remains statistically significant across a variety of model specifications. Small firms are more likely than large firms to finance investment spending through accumulation of liquid assets. Contrary to the complementarity hypothesis, however, there is some evidence that firms treat liquid assets and capital as substitutes. Specification tests comparing the Shaw hypothesis with the McKinnon hypothesis weakly favour the complementarity model.