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The Risky Spread, Investment, and Monetary Policy Transmission: Evidence on the Role of Asymmetric Information

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  • Ng, S.
  • Schaller, H.

Abstract

Financing constraints can arise when there are important information asymmetries in financial markets. Using Canadian panel data, the authors reject a symmetric information specification of investment behavior in favor of an agency cost specification in which the shadow cost of finance can diverge from the market interest rate. The authors' empirical estimates suggest that shocks to net worth, as reflected in the risky spread and firm-specific balance sheet variables, can dramatically increase the shadow cost of finance. Tests which draw on distinctive institutional features of the Canadian economy show that it is firms in a weak informational position which tend to be responsible for this result. Copyright 1996 by MIT Press.

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File URL: http://hdl.handle.net/1866/2035
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9515.

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Length: 24 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:mtl:montde:9515

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Cited by:
  1. Simon Gilchrist & Charles P. Himmelberg, 1993. "Evidence on the role of cash flow for investment," Finance and Economics Discussion Series 93-7, Board of Governors of the Federal Reserve System (U.S.).
  2. Sena, Vania, 2006. "The determinants of firms' performance: Can finance constraints improve technical efficiency?," European Journal of Operational Research, Elsevier, vol. 172(1), pages 311-325, July.
  3. Pesaran, M.H. & Ruge-Murcia, F.J., 1995. "A Discrete-Time Version of Target Zone Models with Jumps," Cahiers de recherche 9530, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Robert Chirinko & Huntley Schaller, 2002. "A Revealed Preference Approach to Understanding Corporate Governance Problems: Evidence from Canada," Emory Economics 0210, Department of Economics, Emory University (Atlanta).
  5. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
  6. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
  7. Guariglia, Alessandra & Mateut, Simona, 2010. "Inventory investment, global engagement, and financial constraints in the UK: Evidence from micro data," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 239-250, March.
  8. 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.
  9. Sprumont, Y., 1995. "On the Game-Theoretic Structure of Public-Good Economies," Cahiers de recherche 9519, Universite de Montreal, Departement de sciences economiques.
  10. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
  11. Touhami, A. & Martens, A., 1996. "Macroemesures in Computable General Equilibrium Models: a Probabilistic Treatment with an Application to Morocco," Cahiers de recherche 9621, Universite de Montreal, Departement de sciences economiques.

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