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Modeling the Effects of Financial Constraints on Firm's Investment

  • Tomat, Gian Maria
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    The paper develops a model of firm´s investment under uncertainty with financial market imperfections and analyzes the effects of financial constraints on firm´s investment. Firm´s investment is an increasing function of the firm´s marginal q, however the investment function is characterized by an upper bound that depends on the firm´s borrowing capabilities. The firm´s marginal q is the sum of the expected value of the marginal profitability of the physical capital stock and of a positive external finance premium. In the presence of financial market imperfections the firm forms expectations about future financial conditions and these expectations raise the firm´s current marginal q. Similarly, the shadow price of firm´s debt is the sum of the interest cost of debt repayment and of a provision for external finance that depends on the firm´s expectations over future financial conditions.

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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-9
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    File URL: http://econstor.eu/bitstream/10419/18022/1/economics_2008-9.pdf
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    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 2 (2008)
    Issue (Month): ()
    Pages: 1-26

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    Handle: RePEc:zbw:ifweej:7126
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