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Financing constraint, over-investment and market-to-book ratio

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  • Braouezec, Yann

Abstract

In a simple symmetric information continuous-time model, we consider leverage as way to finance a fraction of the investment cost. We show that underinvestment cannot arise while overinvestment may and the room for overinvestment is negatively related with the fraction paid by equityholders. Finally, we show that our model predicts the (empirically observed) negative relation between the market-to-book ratio and the leverage ratio.

Suggested Citation

  • Braouezec, Yann, 2009. "Financing constraint, over-investment and market-to-book ratio," Finance Research Letters, Elsevier, vol. 6(1), pages 13-22, March.
    • Handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:13-22
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    Cited by:

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