The effects of portfolio investments flows in firms’ capital structure: a study of Brazilian firms from retail and textile sectors

Abstract

Prior research suggested that the flow of portfolio investments reduces the equity cost of firms, by a reduction in the expected return of stocks that follows from the sharing of risk associated to the financial asset between domestic and international investors. The objective of the study was to verify whether the flow of portfolio investments causes firms to adjust their levels of leverage, reflecting a marginal reduction of own capital cost relative to external capitals. The method employed was panel data regressions, using the first-differenced estimator. Results suggest that firms in the sample in fact adjusted their capital structure following portfolio investment flows, as the marginal effect of portfolio flows in the debt-to-assets ratio is negative. Larger firms and firms with higher growth opportunities presented a higher marginal reduction on leverage.