Financial constraints and company investment
AbstractThe question we address in this paper is whether the investment spending of at least some firms is affected by the availability of internally generated finance (retained earnings), reflecting some constraint on the ability of these firms to raise external finance (debt or new equity) for investment. The opposing view is that the cost at which investment funds can be obtained, taken to be independent of the amount invested, is the only financial consideration that matters in the determination of investment. This is an old question in economics, which has been the subject of several official inquiries as well as a large body of academic research. The answer to this question has a number of important implications. Profits are highly cyclical, so if investment depends directly on the availability of profits then investment spending will be more sensitive to fluctuations in economic activity than would otherwise be the case. This could be an important factor in the propagation of business cycles. If post-tax profits help to determine investment spending then the impact of company taxes on investment will be more complicated than is often assumed. In particular, the average tax rate will influence the level of investment spending, in addition to the impact of taxes on the cost of capital, and any increase in the total revenue raised from corporation tax could have a directly adverse impact on business investment. There may also be an incentive for firms with available internal funds to take over firms whose investment spending is constrained, resulting in take-over activity that would otherwise be inefficient. To the extent that financial constraints on investment spending are attributable to imperfections in capital markets or to market failures, there may also be some motivation for policy measures designed to reduce these impacts, if financial constraints are found to be pervasive.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Institute for Fiscal Studies in its journal Fiscal Studies.
Volume (Year): 15 (1994)
Issue (Month): 2 (May)
Contact details of provider:
Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE
Phone: (+44) 020 7291 4800
Fax: (+44) 020 7323 4780
Web page: http://www.ifs.org.uk
More information through EDIRC
Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988.
"Financing Constraints and Corporate Investment,"
NBER Working Papers
2387, National Bureau of Economic Research, Inc.
- Michael Devereux, 1987. "On the growth of corporation tax revenues," Fiscal Studies, Institute for Fiscal Studies, vol. 8(2), pages 77-85, May.
- Jeremy Edwards, 1984. "Does dividend policy matter?," Fiscal Studies, Institute for Fiscal Studies, vol. 5(1), pages 1-17, February.
- Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
- Steve Bond & Kevin Denny & Michael Devereux, 1993. "Capital allowances and the impact of corporation tax on investment in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 1-14, May.
- Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
- Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
- Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
- Hayashi, Fumio, 1982.
"Tobin's Marginal q and Average q: A Neoclassical Interpretation,"
Econometric Society, vol. 50(1), pages 213-24, January.
- Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kang Kook Lee & Md. Rabiul Islam, 2009.
"Financial Development And Financing Constraints In A Developing Country - The Case Of Bangladesh,"
Development Research Unit Working Paper Series
09-09, Monash University, Department of Economics.
- Lee, Kang-Kook & Islam, Md. Rabiul, 2011. "Financial Development and Financing Constraints in a Developing Country: The Case of Bangladesh," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 46(1), pages 41-67.
- Pedro Elosegui & Paula Español & Demian Panigo & Emilio Blanco, 2007.
"The Asymmetrical Impact of Restrictions to Financing in Argentina. Comparison by Sector, Size and Origin of Ownership (1995-2003),"
Central Bank of Argentina, Economic Research Department, vol. 1(48), pages 73-107, July - Se.
- Pedro Elosegui & Paula Español & Demian Panigo & Emilio Blanco, 2007. "The Asymmetrical Impact of Restrictions to Financing in Argentina. Comparison by Sector, Size and Origin of Ownership (1995-2003)," BCRA Working Paper Series 200724, Central Bank of Argentina, Economic Research Department.
- Alex Coad, 2007.
"Neoclassical vs evolutionary theories of financial constraints : critique and prospectus,"
Documents de travail du Centre d'Economie de la Sorbonne
r07008, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
- Alex Coad, 2007. "Neoclassical vs Evolutionary Theories of Financial Constraints : Critique and Prospectus," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00144415, HAL.
- Sophie Manigart & Katleen Baeyens & Ilse Verschueren, 2002.
"Financing and investment interdependencies in unquoted belgian compagnies: the role of venture capital,"
Working Paper Research
29, National Bank of Belgium.
- Sophie Manigart & Katleen Baeyens & Ilse Verschueren, 2002. "Financing and investment interdependencies in unquoted Belgian companies: the role of venture capital," Vlerick Leuven Gent Management School Working Paper Series 2002-16, Vlerick Leuven Gent Management School.
- Short, Helen & Zhang, Hao & Keasey, Kevin, 2002. "The link between dividend policy and institutional ownership," Journal of Corporate Finance, Elsevier, vol. 8(2), pages 105-122, March.
- Goergen, Marc & Renneboog, Luc, 2001.
"Investment policy, internal financing and ownership concentration in the UK,"
Journal of Corporate Finance,
Elsevier, vol. 7(3), pages 257-284, September.
- Goergen, M. & Renneboog, L.D.R., 2000. "Investment Policy, Internal Financing and ownership Concentration in the UK," Discussion Paper 2000-116, Tilburg University, Center for Economic Research.
- Crafts, Nicholas & Mills, Terence C, 2001. "TFP Growth in British and German Manufacturing, 1950-96," CEPR Discussion Papers 3078, C.E.P.R. Discussion Papers.
- Driffield, Nigel & Pal, Sarmistha, 2006.
"Do external funds yield lower returns?: Recent evidence from East Asian economies,"
Journal of Asian Economics,
Elsevier, vol. 17(1), pages 171-188, February.
- Sarmistha Pal & Nigel Driffield, 2003. "Do External Funds Yield Lower Returns ? Recent Evidence From East Asian Economies," Finance 0309002, EconWPA, revised 15 Mar 2004.
- Sarmistha Pal, 2005. "Do External Funds Yield Lower Returns? Recent Evidence From East Asian Economies," Development and Comp Systems 0512021, EconWPA.
- Valderrama, Maria Teresa, 2002.
"Credit Channel and Investment Behavior in Austria: A Micro-Econometric Approach,"
58, Oesterreichische Nationalbank (Austrian Central Bank).
- Valderrama, Maria Teresa, 2001. "Credit channel and investment behaviour in Austria: a micro-econometric approach," Working Paper Series 0108, European Central Bank.
- repec:onb:oenbwp:y::i:58:b:1 is not listed on IDEAS
- Atzeni, Gianfranco E. & Carboni, Oliviero A., 2008. "The effects of grant policy on technology investment in Italy," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 381-399.
- Marie Diron & Maria Cruz Manzano & Thomas Westermann, 2005. "Forecasting aggregate investment in the euro area: do indicators of financial conditions help?," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 206-27 Bank for International Settlements.
- John Pointon & Suzanne Farrar & Jon Tucker, 1996. "European taxation and capital investment," The European Journal of Finance, Taylor & Francis Journals, vol. 2(1), pages 57-76.
- Alfred Haid, 2001. "Proceedings of the 3rd Workshop on Corporate Governance in Europe: Einführung," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(2), pages 193-200.
- Gianni La Cava, 2005. "Financial Constraints, the User Cost of Capital and Corporate Investment in Australia," RBA Research Discussion Papers rdp2005-12, Reserve Bank of Australia.
- Ahmed, S., 2004. "Modelling corporate tax liabilities using company accounts: a new framework," Cambridge Working Papers in Economics 0412, Faculty of Economics, University of Cambridge.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephanie Seavers).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.