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Investment and Financial Constraints An Empirical Analysis of Norwegian Firms

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    Abstract

    This paper investigates the relationship between a firm's investment decision and its financial situation. We present a model of investment, where the cost of external finance is increasing in the debt ratio. The model is estimated using a panel of Norwegian manufacturing establishments for the period 1977-1990. The empirical analysis finds a positive relationship between a firm's debt ratio and its marginal return to capital. This indicates that firms with high debt ratios have higher costs of finance than other firms. Including convex adjustment costs in the model did not change this result, as the size of the adjustment costs was found to be very small.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp_109.pdf
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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 109.

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    Date of creation: Feb 1994
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    Handle: RePEc:ssb:dispap:109

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    Keywords: Investment; Financial markets; Panel data.;

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    Cited by:
    1. Mundaca, B. Gabriela, 2007. "Corporate investment, cash flow level and market imperfections: The case of Norway," Memorandum 03/2007, Oslo University, Department of Economics, revised 23 Feb 2009.
    2. Forest, Danielle & Gouriéroux, Christian & Salvas-Bronsard, Lise, 1997. "D’une analyse de variabilités à un modèle d’investissement des firmes," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(1), pages 331-350, mars-juin.

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