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Financing Hierarchy, Financial Market Constraints, Leverage and Investment Financing in a Low-Income Developing Country

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  • Omotunde E.G. Johnson

    (International Monetary Fund)

Abstract

A debt-service constraint and co-financing requirement for outside equity financing are incorporated into a financing hierarchy framework in which firms behave as if they prefer inside to outside financing and debt to equity when they use outside financing. The constraints place both a floor and a ceiling on the ratios of debt to outside financing and a ceiling on the ration of outside equity to outside finance. If creditors and outside investor act in concert, under certain conditions, they may wholly finance projects of firms. But then the entrepreneur may not be able to attain the optimal unconstrained equilibrium combination of debt and outside equity.

Suggested Citation

  • Omotunde E.G. Johnson, 1992. "Financing Hierarchy, Financial Market Constraints, Leverage and Investment Financing in a Low-Income Developing Country," Journal of African Development, African Finance and Economic Association, vol. 1(2), pages 77-94.
  • Handle: RePEc:afe:journl:v:1:y:1992:i:2:p:77-94
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