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Testing financial constraints on firm investment using variable capital

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  • Andrea Caggese

Abstract

We consider a dynamic multifactor model of investment with financing imperfections, adjustment costs and fixed and variable capital. We use the model to derive a test of financing constraints based on a reduced form variable capital equation. Simulation results show that this test correctly identifies financially constrained firms even when the estimation of firms’ investment opportunities is very noisy. In addition, the test is well specified in the presence of both concave and convex adjustment costs of fixed capital. We confirm empirically the validity of this test on a sample of small Italian manufacturing companies.

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2003 with number 9.

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Date of creation: 27 Sep 2004
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Handle: RePEc:mmf:mmfc03:9

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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Cited by:
  1. Christian Bayer, 2004. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Econometrics 0405001, EconWPA.
  2. Andrea Caggese, 2003. "Financing Constraints, Irreversibility, and Investment Dynamics," FMG Discussion Papers dp440, Financial Markets Group.
  3. Guariglia, Alessandra & Tsoukalas, John & Tsoukas, Serafeim, 2012. "Investment, irreversibility, and financing constraints: Evidence from a panel of transition economies," Economics Letters, Elsevier, vol. 117(3), pages 582-584.
  4. Agustinus Prasetyantoko, 2006. "Financing Constraint and Firm Investment Following a Financial Crisis in Indonesia," Post-Print halshs-00133964, HAL.
  5. Bazdresch, Santiago, 2013. "The role of non-convex costs in firms' investment and financial dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 929-950.
  6. Andrea Caggese & Vicente Cuñat, 2006. "Financing constraints and fixed-term employment contracts," Economics Working Papers 1010, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Santiago Carbó Valverde & Francisco Rodríguez-Fernández & Gregory F. Udell, 2008. "Bank lending, financing constraints and SME investment," Working Paper Series WP-08-04, Federal Reserve Bank of Chicago.
  8. Chris Edson, 2012. "The capital constraining effects of the norwegian wealth tax," Discussion Papers 724, Research Department of Statistics Norway.
  9. Alessandra Guariglia & John Tsoukalas & Serafeim Tsoukas, . "Investment, irreversibility, and financing constraints in transition economies," Discussion Papers 10/03, University of Nottingham, School of Economics.
  10. Andrea Caggese, 2005. "Financing Imperfections and the Investments Decisions of Privately Owned Firms," Working Papers 265, Barcelona Graduate School of Economics.
  11. Bellmann, Lutz & Gerner, Hans-Dieter & Hübler, Olaf, 2013. "Investment under Company-Level Pacts," IZA Discussion Papers 7195, Institute for the Study of Labor (IZA).

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