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The Risky Spread, Investment, and Monetary Policy Transmission: Evidence on the Role of Asymmetric Information

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  • Ng, Serena
  • Schaller, Huntley

Abstract

Financing constraints can arise when there are important information asymmetries in financial markets. Using Canadian panel data, the authors reject a symmetric information specification of investment behavior in favor of an agency cost specification in which the shadow cost of finance can diverge from the market interest rate. The authors' empirical estimates suggest that shocks to net worth, as reflected in the risky spread and firm-specific balance sheet variables, can dramatically increase the shadow cost of finance. Tests which draw on distinctive institutional features of the Canadian economy show that it is firms in a weak informational position which tend to be responsible for this result. Copyright 1996 by MIT Press.

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  • Ng, Serena & Schaller, Huntley, 1996. "The Risky Spread, Investment, and Monetary Policy Transmission: Evidence on the Role of Asymmetric Information," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 375-383, August.
  • Handle: RePEc:tpr:restat:v:78:y:1996:i:3:p:375-83
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    Cited by:

    1. Pesaran, M.H. & Ruge-Murcia, F.J., 1995. "A Discrete-Time Version of Target Zone Models with Jumps," Cahiers de recherche 9530, Universite de Montreal, Departement de sciences economiques.
    2. Sangeeta Pratap & Silvio Rendon, 2003. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 513-545, July.
    3. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
    4. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
    5. Guariglia, Alessandra & Mateut, Simona, 2010. "Inventory investment, global engagement, and financial constraints in the UK: Evidence from micro data," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 239-250, March.
    6. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    7. Chirinko, Robert S. & Schaller, Huntley, 2004. "A revealed preference approach to understanding corporate governance problems: Evidence from Canada," Journal of Financial Economics, Elsevier, vol. 74(1), pages 181-206, October.
    8. Sena, Vania, 2006. "The determinants of firms' performance: Can finance constraints improve technical efficiency?," European Journal of Operational Research, Elsevier, vol. 172(1), pages 311-325, July.
    9. Yves Sprumont, 1998. "On the Game-Theoretic Structure of Public-Good Economies," International Journal of Game Theory, Springer;Game Theory Society, vol. 26(4), pages 455-472.
    10. Touhami, A. & Martens, A., 1996. "Macroemesures in Computable General Equilibrium Models: a Probabilistic Treatment with an Application to Morocco," Cahiers de recherche 9621, Universite de Montreal, Departement de sciences economiques.
    11. repec:taf:eurjfi:v:24:y:2018:i:6:p:439-457 is not listed on IDEAS
    12. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    13. Manzur Quader & Karl Taylor, 2018. "Corporate efficiency, credit status and investment," The European Journal of Finance, Taylor & Francis Journals, vol. 24(6), pages 439-457, April.
    14. Mark Illing & Ying Liu, 2003. "An Index of Financial Stress for Canada," Staff Working Papers 03-14, Bank of Canada.

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