A Model of Firm Behaviour with Bankruptcy Costs and Imperfectly Informed Lenders
Based on Greenwald and Stiglitz (1988,1990), this work explores a simple model of microeconomic behaviour that incorporates the impact of asymmetric information in capital markets on firms’ optimal investment decision rules. Starting from a model of equity-constrained firms, where expected bankruptcy costs (reflecting each firm’s quality) imply a higher user cost of capital and, thus, a lower investment by each firm, we move to a context of adverse selection in the debt market, where banks offer a ‘one-size-fits-all’ contractual interest rate. This implies that ‘poor’ firms tend to invest more vis-à-vis ‘good’ firms, since they now take into account that higher expected default rates may not be matched by comparably higher contractual interest rates, therefore weakening the impact of bankruptcy costs on firms’ investment decisions.
Volume (Year): (2005)
Issue (Month): 22 (December)
|Contact details of provider:|| Postal: Av. Dias da Silva, 165, 3004-512 COIMBRA|
Phone: + 351 239 790 500
Fax: + 351 239 40 35 11
Web page: http://impactum-journals.uc.pt/index.php/notaseconomicas
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:gmf:journl:y:2005:i:22:p:6-22. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ana Seiça)
If references are entirely missing, you can add them using this form.