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Asymmetric Information, Liquidity Constraints and Canadian Investment

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  • Huntley Schaller

Abstract

A new theoretical literature has suggested that the Modigliani-Miller theorem may not hold under imperfect information and that liquidity may affect a firm's investment spending. This paper provides three original tests for such capital market imperfections based on predicted differences in investment between firms in different informational positions with respect to potential creditors or investors. The empirical tests suggest that information asymmetries have a large effect on investment behavior. The form of the tests reduces the likelihood of biases due to problems of endogeneity. The paper also examines the effect of differential measurement error on the tests.

Suggested Citation

  • Huntley Schaller, 1993. "Asymmetric Information, Liquidity Constraints and Canadian Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 552-574, August.
  • Handle: RePEc:cje:issued:v:26:y:1993:i:3:p:552-74
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Krugman, Paul R, 1987. "Is Free Trade Passe?," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 131-144, Fall.
    3. Joel Fried, 1980. "The Intergenerational Distribution of the Gains from Technical Change and from International Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 13(1), pages 65-81, February.
    4. Dornbusch, Rudiger, 1985. "Intergenerational and international trade," Journal of International Economics, Elsevier, vol. 18(1-2), pages 123-139, February.
    5. Kareken, John & Wallace, Neil, 1977. "Portfolio autarky: A welfare analysis," Journal of International Economics, Elsevier, vol. 7(1), pages 19-43, February.
    6. Starrett, David A, 1972. "On Golden Rules, the "Biological Theory of Interest," and Competitive Inefficiency," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 276-291, March-Apr.
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