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A Model of Firm Behaviour with Equity Constraints and Bankruptcy Costs

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  • Pedro Mazeda Gil

    ()
    (Faculdade de Economia da Universidade do Porto)

Abstract

Based on Greenwald and Stiglitz (1988,1990), this work explores a simple model of microeconomic behaviour which incorporates the impact of capital markets imperfections generated by asymmetric information on firms’ optimal investment decision rules. In particular, this paper analyses how a specific form of asymmetric information problem (adverse selection) may imply lower investment than otherwise through the reduction of the firms’ ability to raise external financing – either in the form of credit rationing or the ‘voluntary’ reduction of firms’ borrowing activity. The natural follow-up to this work would be to formally show how a loan market where both contractual interest rates and loan sizes are (a priori) variable may be characterised by a credit rationing equilibrium.

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File URL: http://www.fep.up.pt/investigacao/workingpapers/03.11.18_WP134_Pedro%20Gil.pdf
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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 134.

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Length: 26 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:por:fepwps:134

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Keywords: Asymmetric Information; Firm Behaviour; Investment Financing;

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  1. Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 160-65, May.
  2. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
  3. Bruce C. Greenwald & Joseph E. Stiglitz & Andrew Weiss, 1985. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations," NBER Working Papers 1335, National Bureau of Economic Research, Inc.
  4. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 77-114, February.
  5. Joshua Aizenman & Andrew Powell, 1997. "Volatility and Financial Intermediation," NBER Working Papers 6320, National Bureau of Economic Research, Inc.
  6. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
  7. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
  8. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  9. Stiglitz, Joseph E., 1992. "Capital markets and economic fluctuations in capitalist economies," European Economic Review, Elsevier, vol. 36(2-3), pages 269-306, April.
  10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  11. Bruce C. Greenwald & Joseph E. Stiglitz & Andrew Weiss, 1989. "Macroeconomic models with equity and credit rationing," Proceedings, Federal Reserve Bank of San Francisco.
  12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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