Investment, Financing Constraints and the Euler Equation
In what follows, we show that financing constraints affects firm's investment decisions before the constraints is binding. This occurs because the firm anticipates at the current time the future bound. We argue that, even with imperfect capital markets, investment policy must be such that there are no arbitrage opportunities at any time. Contrary to the usual "expectations view", this forward looking behavior guarantees the respect of the Euler quation even when the restriction is binding, that is the optimality of the constrained investment decisions.
|Date of creation:||Feb 2002|
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