RDP 2005-12: Financial Constraints, the User Cost of Capital and Corporate Investment in Australia Appendix A: Variable Definitions, Sources and Summary Statistics

Gianni La Cava

December 2005

Table A1: Summary of Variable Definitions
Net capital stock (K) According to the perpetual inventory method (see Appendix B).
Investment rate (I/K) (Net capital stock in current period – net capital stock in previous period – fixed asset revaluations + depreciation)/net capital stock in previous period.
Depreciation rate (δ) Depreciation expenses/net capital stock. Calculated at industry level.
Depreciation allowances (Z) See Appendix B for details of calculations.
Capital goods price deflator (PK) Implicit price deflator for property, plant and equipment, ABS Cat No 5206.0.
Output price deflator (PY) GDP deflator, ABS Cat No 5206.0.
Corporate tax rate (τ) Corporate marginal tax rates, Australian Taxation Office.
Average interest rate (i) Interest expenses/debt.
User cost of capital (UC) According to Equations (1–4).
Sales (S) Total sales or trading revenue.
Output (Y) Total sales revenue/output price deflator.
Cash flow (CF) Net profits after tax + depreciation expenses.
Cash flow to capital ratio (CF/K) Cash flow/net capital stock in previous period.
Dividend cutting dummy (DIVCUT) Equals one if firm has cut dividends in the current and/or previous period; zero otherwise.
Financially constrained dummy (FC) Equals one if firm has cut dividends in the current and/or previous period and reports cash flow > 0; zero otherwise.
Financially distressed dummy (FC) Equals one if firm has cut dividends in the current and/or previous period and reports cash flow < 0; zero otherwise.
Loss maker dummy (LM) Equals one if firm has not cut dividends in the current and/or previous period but reports cash flow < 0; zero otherwise.
Book value of assets (A) Total assets.
Market capitalisation / market value of equity (MKTCAP) Product of the number of outstanding shares and the year-ended share price.
Book value of equity (E) Total assets – total liabilities.
Debt (D) Short-term + long-term debt from financial institutions and financial leases + non-current convertible notes. Book value is taken as a proxy for market value.
Liquid assets (CASH) Stock of cash and its equivalent, including cash on hand, cash and short-term deposits held at financial institutions.
Tobin's Q (Q) (Market value of equity + book value of debt – cash) / (net capital stock at replacement cost + inventories). See Mills et al (1994) for further details.
Table A2: Sample Summary Statistics
All firms Mean Median Standard deviation Minimum Maximum
Investment rate (per cent) 0.29 0.14 0.56 −0.4 5.5
Output growth (percentage change) 0.10 0.06 0.33 −1.5 2.0
User cost of capital (per cent) 0.23 0.23 0.05 0.1 0.5
User cost of capital growth (percentage change) −0.02 −0.02 0.21 −0.5 0.4
Cash flow to capital ratio (per cent) −0.9 0.18 4.8 −58.7 5.0
Q ratio 10.0 1.6 37.7 −10.4 981
Unconstrained firms Mean Median Standard deviation Minimum Maximum
Investment rate (per cent) 0.31 0.14 0.59 −0.4 5.5
Output growth (percentage change) 0.13 0.08 0.33 −1.5 2.0
User cost of capital (per cent) 0.23 0.23 0.05 0.1 0.5
User cost of capital growth (percentage change) −0.02 −0.02 0.20 −0.5 0.4
Cash flow to capital ratio (per cent) −1.2 0.20 5.4 −58.7 4.9
Q ratio 11.9 1.8 42.0 −10.4 981
Constrained firms Mean Median Standard deviation Minimum Maximum
Investment rate (per cent) 0.21 0.11 0.40 −0.4 4.0
Output growth (percentage change) −0.01 0.00 0.28 −1.3 1.4
User cost of capital (per cent) 0.23 0.23 0.05 0.1 0.5
User cost of capital growth (percentage change) −0.04 −0.04 0.22 −0.5 0.4
Cash flow to capital ratio (per cent) 0.07 0.13 0.97 −13.3 5.0
Q ratio 2.1 1.1 3.6 −0.4 38.9

Looking at the industry composition of the sample we can see that around two-thirds of all listed Australian companies are in the industrials, financial services, materials or consumer discretionary industries (Table A3).

Table A3: Industry Composition
Per cent of all firms
GICS category Original sample Final sample
Materials 28.4 27.2
Industrials 13.3 23.1
Consumer discretionary 12.8 23.1
Financial services 14.6 0.0
Information technology 8.3 9.0
Healthcare 7.4 3.6
Consumer staples 5.5 10.8
Energy 6.9 3.2
Telecommunication services 2.1 0.0
Utilities 0.9 0.0
Total 100 100
Notes: Firms are classified by industry according to their principal activity under the Global Industry Classification System (GICS).

Apart from the deliberate removal of financial services, the deletion of firms according to the sample selection criteria appears to have increased the weight on firms in the industrials, consumer discretionary and consumer staples industries at the expense of firms in the healthcare, energy, telecommunication services and utilities industries.