Economics: The Open-Access, Open Assessment E-Journal http://www.economics-ejournal.org en Gian Maria Tomat Modeling the Effects of Financial Constraints on Firm's Investment 2008-03-17 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. http://www.economics-ejournal.org/economics/journalarticles/2008-9 JEL D92 JEL E22