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Abstract
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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Comments and Questions
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In light of the two reports, I’m delighted to invite the author to revise his paper taking into consideration the comments received. I’m looking forward to reading the new version.
Attached is an invited reader comment on "Modeling the Effects of Financial Constraints on Firm's Investment" by Gian Maria Tomat
see attached file
see attached file
Main indications of the report are regarding the theoretical foundations of the model and its contribution. Some references to recent work are made for comparison.
I am willing to provide a revised version taking into account of the indications in the report.
In particular, since model is based on traditional ...[more]
... theory of investment I would tend to provide more foundations along the traditional investment literature, the literature on asymmetric information, agency and investment and the financial accelerator literature.
In turn a more clear description of the paper contribution would be provided. The field is the empirical estimation of investment equations, the paper provides a description of how measurement error can bias estimates in models with q and financing contraints. I realize this is not stated clearly in the present version and that the exposition can be improved.
References to more recent literature could be made in the new version, although I usually tend to prefer foundations to articles that address similar issues from different point of departures. I could however have a closer look at the suggested readings before turning a new version of the paper.
Finally a response to the other more specific points made could be made in due course.
see attached file