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Modeling the Effects of Financial Constraints on Firm's Investment

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  • Tomat, Gian Maria
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    Abstract

    The paper develops a model of firm´s investment under uncertainty with financial market imperfections and analyzes the effects of financial constraints on firm´s investment. Firm´s investment is an increasing function of the firm´s marginal q, however the investment function is characterized by an upper bound that depends on the firm´s borrowing capabilities. The firm´s marginal q is the sum of the expected value of the marginal profitability of the physical capital stock and of a positive external finance premium. In the presence of financial market imperfections the firm forms expectations about future financial conditions and these expectations raise the firm´s current marginal q. Similarly, the shadow price of firm´s debt is the sum of the interest cost of debt repayment and of a provision for external finance that depends on the firm´s expectations over future financial conditions. --

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    Bibliographic Info

    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 2 (2008)
    Issue (Month): 9 ()
    Pages: 1-26

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    Handle: RePEc:zbw:ifweej:7126

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    Keywords: Firm´s investment; financial constraints; Tobin´s marginal q; uncertainty;

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