Investment and Asset Prices with Financing Constraints
AbstractThis paper investigates the role of financial market frictions on investment and the price of financial asset. We show that standard models with financial market imperfections can be summarized with a simple financing cost function, equal to the product of the financing premium and the amount of external finance. This parsimonious representation allows us to investigate the effects of financing constraints on firm level investment behavior. Specifically we derive explicit relations between investment and Tobinâ€™s q in the presence of financial market imperfections. We show that this relation depends not only on fundamentals, such as profits and investment, but also on financing variables, such as financing premium and the amount of external financing. In addition we also derive a set of asset pricing restrictions that can be used to estimate the role of financial constraints on investment
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 806.
Date of creation: 2004
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Financing Constraints; Investment; Asset Prices;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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