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Investment, Irreversibility, and Financial Imperfections

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  • Richard W P Holt

Abstract

Research finds that firms' investment decisions are distorted by irreversibility and finance constraints. Whereas the existing literature examines the effects of these features separately, this paper studies their interaction. The impact of these constraints on a firm's incentive to invest is characterised using option pricing techniques. Financial constraints reduce the initial capacity, raise the marginal value product of capital and the value of the option to invest.

Suggested Citation

  • Richard W P Holt, 2000. "Investment, Irreversibility, and Financial Imperfections," Edinburgh School of Economics Discussion Paper Series 54, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:54
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    File URL: http://www.econ.ed.ac.uk/papers/id54_esedps.pdf
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    References listed on IDEAS

    as
    1. Luigi Guiso & Giuseppe Parigi, 1999. "Investment and Demand Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 185-227.
    2. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    3. Scaramozzino, Pasquale, 1997. "Investment Irreversibility and Finance Constraints," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 89-108, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    irreversible investment; financial constraints;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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