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Investment, Irreversibility, and Financial Imperfections

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Author Info
Richard Holt ()

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Abstract

Research finds that firms' investment decisions are distorted by irreversibility and finance constraints. Whereas the existing literature examines the exects of these features separately, this paper studies their interaction. The impact of these constraints on a firm's incentive to invest is characterised using option pricing techniques. Financial constraints reduce the initial capacity, raise the marginal value product of capital and the value of the option to invest.

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Publisher Info
Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 54.

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Length: 12
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:edn:esedps:54

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Related research
Keywords: Irreversible investment; financial constraints;

Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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References listed on IDEAS
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  1. Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, vol. 44(2), pages 281-304, February. [Downloadable!] (restricted)
  2. 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)
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  3. Vercammen, James, 2000. "Irreversible investment under uncertainty and the threat of bankruptcy," Economics Letters, Elsevier, vol. 66(3), pages 319-325, March. [Downloadable!] (restricted)
  4. Andrew B. Abel & Avinash Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 753-77, August. [Downloadable!] (restricted)
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  5. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 185-227, February. [Downloadable!] (restricted)
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  6. Scaramozzino, Pasquale, 1997. "Investment Irreversibility and Finance Constraints," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 89-108, February.
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