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Finance constraints, liquidity, and investment spending: theoretical restrictions and international evidence

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  • Robert S. Chirinko

Abstract

Theoretical and empirical models of investment spending have treated financial structure very differently. Recent research has begun to narrow this gap and, based on developments in the economics of information, has drawn theoretical links between investment spending and the frictions and constraints in financial markets. Furthermore, the sensitivity of investment to liquidity and other financial variables has been documented empirically for several industrialized countries. Despite this progress, the theoretical advances have not been exploited fully in econometric work, and questions remain concerning the interpretation of empirical results. To continue to narrow the gap between theoretical and empirical investment models, this paper studies finance constraints in a formal framework, explores their impact on the specification of Q investment equations, and develops two new tests of finance constraints that are evaluated for firms in several countries. While these tests provide some support for the importance of finance constraints, they temper previous conclusions and highlight the critical role for explicit theoretical models in guiding empirical research.

Suggested Citation

  • Robert S. Chirinko, 1996. "Finance constraints, liquidity, and investment spending: theoretical restrictions and international evidence," Research Working Paper 96-04, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:96-04
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    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, July.
    3. von Kalckreuth, Ulf & Jorg Breitung & Robert S Chirinko, 2003. "A Vectorautoregressive Investment Model (VIM) and Monetary Policy Transmission: Panel Evidence from German Firms," Royal Economic Society Annual Conference 2003 213, Royal Economic Society.
    4. Rune Stenbacka & Mihkel Tombak, 2002. "Investment, Capital Structure, and Complementarities Between Debt and New Equity," Management Science, INFORMS, vol. 48(2), pages 257-272, February.
    5. Saltari, Enrico & Travaglini, Giuseppe, 2006. "The effects of future financing constraints on capital accumulation: Some new results on the constrained investment problem," Research in Economics, Elsevier, vol. 60(2), pages 85-96, June.
    6. Jean-Bernard Chatelain, 2003. "Structural modelling of financial constraints on investment: where do we stand?," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 2, pages 40-58, Edward Elgar Publishing.
    7. Stijn Claessens & M. Ayhan Kose, 2017. "Asset Prices and Macroeconomic Outcomes: A Survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms’ Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, September.
    9. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
    10. Fohlin, Caroline, 1999. "Universal Banking in Pre-World War I Germany: Model or Myth?," Explorations in Economic History, Elsevier, vol. 36(4), pages 305-343, October.
    11. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
    12. Miwa, Yoshiro & Ramseyer, J. Mark, 2006. "The Fable of the Keiretsu," University of Chicago Press Economics Books, University of Chicago Press, number 9780226532707.
    13. Gelos, R. Gaston & Werner, Alejandro M., 2002. "Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector," Journal of Development Economics, Elsevier, vol. 67(1), pages 1-27, February.
    14. Miarka, Tobias, 1999. "The recent economic role of bank-firm relationships in Japan," Discussion Papers, Research Unit: Market Dynamics FS IV 99-36, WZB Berlin Social Science Center.

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