This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Firm Investment in Imperfect Capital Markets: A Structural Estimation

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Sangeeta Pratap (ITAM)
Silvio Rendon (University of Western Ontario)

Additional information is available for the following registered author(s):

Abstract

In this paper we characterize and estimate the degree to which liquidity constraints affect real activity. We set up a dynamic model of firm investment and debt in which liquidity constraints enter explicitly into the firm's maximization problem, so that investment depends positively on the firm's financial position. The optimal policy rules are incorporated into a maximum likelihood procedure to estimate the structural parameters of the model. We identify liquidity constraints from the dynamics of a firm's evolution, as formalized by the dynamic estimation process, and find that they significantly affect investment decisions of firms. Firms ability to raise equity is about 73% of what it would have been under free capital markets. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is about 6% higher over a period of 20 years. Transitory interest rate shocks have a sustained impact on capital accumulation, which lasts for several periods. (Copyright: Elsevier)

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://dx.doi.org/10.1016/S1094-2025(03)00019-X
File Format: application/pdf
File Function: Full text
Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 3 (July)
Pages: 513-545
Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Handle: RePEc:red:issued:v:6:y:2003:i:3:p:513-545

Contact details of provider:
Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101
Fax: 1-860-486-4463
Email:
Web page: http://www.EconomicDynamics.org/review.htm
More information through EDIRC

Order Information:
Email:
Web: http://www.EconomicDynamics.org/RED17.htm

For technical questions regarding this item, or to correct its listing, contact: (Christian Zimmermann).

Related research
Keywords: Investment Liquidity constraints Estimation of dynamic structural models Financial accelerator

Other versions of this item:

Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

References listed on IDEAS
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.:

  1. Mark Gertler & R. Glenn Hubbard & Anil K. Kashyap, 1990. "Interest rate spreads, credit constraints and investment fluctuations: an empirical investigation," Finance and Economics Discussion Series 137, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  2. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August. [Downloadable!] (restricted)
    Other versions:
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
    Other versions:
  4. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Blackwell Publishing, vol. 63(4), pages 595-609, October. [Downloadable!] (restricted)
  5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  6. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    Other versions:
  7. Huntley Schaller, 1993. "Asymmetric Information, Liquidity Constraints and Canadian Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 552-74, August. [Downloadable!] (restricted)
  8. Gian Luca Clementi, 2000. "Ipos And The Growth Of Firms," Computing in Economics and Finance 2000 Z133, Society for Computational Economics. [Downloadable!]
    Other versions:
  9. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  10. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August. [Downloadable!] (restricted)
    Other versions:
  12. Bronwyn H. Hall & Robert E. Hall, 1993. "The Value and Performance of U.S. Corporations," NBER Reprints 1831, National Bureau of Economic Research, Inc.
    Other versions:
  13. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
  14. Albuquerque, R. & Hopenhayn, H.A., 1997. "Optimal Dynamic Lending Contracts with Imperfect Enforceability," RCER Working Papers 439, University of Rochester - Center for Economic Research (RCER).
  15. Sangeeta Pratap & Silvio Rendón, 1996. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Economics Working Papers 274, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1998. [Downloadable!]
    Other versions:
  16. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March. [Downloadable!] (restricted)
    Other versions:
  17. Ng, S. & Schaller, H., 1995. "The Risky Spread, Investment, and Monetary Policy Transmission: Evidence on the Role of Asymmetric Information," Cahiers de recherche 9515, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
    Other versions:
  18. Cooley, Thomas F & Marimon, Ramon & Quadrini, Vincenzo, 2004. "Aggregate Consequences of Limited Contract Enforceability," CEPR Discussion Papers 4173, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  19. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  20. Silvio Rendon, 2002. "Job Search and Asset Accumulation under Borrowing Constraints," Economics Working Papers 649, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  21. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  22. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December. [Downloadable!] (restricted)
  23. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Blackwell Publishing, vol. 35(4), pages 583-606, June. [Downloadable!] (restricted)
  24. Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series 114, Board of Governors of the Federal Reserve System (U.S.).
  25. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 865-88, October. [Downloadable!] (restricted)
    Other versions:
  26. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  27. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 197-222, April. [Downloadable!] (restricted)
    Other versions:
  28. Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  29. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-99, May. [Downloadable!] (restricted)
    Other versions:
  30. Attanasio, Orazio P., 1995. "The intertemporal allocation of consumption: theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42, pages 39-56, June. [Downloadable!] (restricted)
  31. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December. [Downloadable!] (restricted)
    Other versions:
  32. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn. [Downloadable!] (restricted)
  33. Orazio P. Attanasio, 1994. "The Intertemporal Allocation of Consumption: Theory and Evidence," NBER Working Papers 4811, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  34. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-1), pages 141-206. [Downloadable!]
Full references

Cited by:
(explanations, 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.)

  1. Sangeeta Pratap & Carlos Urrutia, 2004. "Firm Dynamics, Investment, and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994," Working Papers 0406, Centro de Investigacion Economica, ITAM. [Downloadable!]
    Other versions:
  2. Sangeeta Pratap, 2000. "Do Adjustment Costs Explain Investment-Cash Flow Insensitivity?," Computing in Economics and Finance 2000 315, Society for Computational Economics. [Downloadable!]
    Other versions:
  3. Sangeeta Pratap & Silvio Rendon, 2003. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 513-545, July. [Downloadable!] (restricted)
    Other versions:
  4. Alexander Cobham, . "Making Bad Decisions: firm size and investment under uncertainty," QEH Working Papers qehwps39, Queen Elizabeth House, University of Oxford. [Downloadable!]
  5. Covas, Francisco & Den Haan, Wouter, 2007. "The Role of Debt and Equity Finance over the Business Cycle," CEPR Discussion Papers 6145, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Silvio Rendón, 2001. "Job Creation under Liquidity Constraints: the Spanish Case," Banco de España Working Papers 0101, Banco de España. [Downloadable!]
    Other versions:
  8. James S. Costain, 1998. "A Simple Model of Multiple Equilibria Based on Risk," Economics Working Papers 407, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 1999. [Downloadable!]
Statistics
Access and download statistics

Did you know? RePEc stands for Research Papers in Economics.

This page was last updated on 2008-6-27.


This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.