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

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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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 93-07.

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Length: 31 pages
Date of creation: 1993
Date of revision: Aug 1996
Publication status: Published: Revised version in Review of Economics and Statistics, Vol.78, No.3 (August 1996), pp. 375–383
Handle: RePEc:car:carecp:93-07
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