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Neoclassical vs evolutionary theories of financial constraints : critique and prospectus

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Author Info
Alex Coad () (Centre d'Economie de la Sorbonne)

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Abstract

Complicated neoclassical models predict that if investment is sensitive to current financial performance, this is a sign that something is "wrong" and is to be regarded as a problem for policy. Evolutionary theory, on the other hand, refers to the principle of "growth of the fitter" to explain investment-cash flow sensitives as the workings of a healthy economy. In particular, I attack the neoclassical assumption of managers maximizing shareholder-value. Such an assumption is not a helpful starting point for empirical studies into firm growth. One caricature of neoclassical theory could be "Assume firms are perfectly efficient. Why aren't they getting enough funding ?", whereas evolutionary theory considers that firms are forever struggling to grow. This essay highlights how policy guidelines can be framed by the initial modelling assumptions, even though these latter are often chosen with analytical tractability in mind rather than realism.

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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number r07008.

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Length: 17 pages
Date of creation: Feb 2007
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Handle: RePEc:mse:cesdoc:r07008

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Related research
Keywords: Financial constraints; firm growth; evolutionary theory; neoclassical theory; investment.;

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Find related papers by JEL classification:
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
G30 - Financial Economics - - Corporate Finance and Governance - - - General

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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. Alexander Coad & Rekha Rao, 2007. "Firm Growth and R&D Expenditure," Papers on Economics and Evolution 2007-10, Max Planck Institute of Economics, Evolutionary Economics Group. [Downloadable!]
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