Journal Article

No. 2008-9 | March 17, 2008
Modeling the Effects of Financial Constraints on Firm's Investment PDF Icon

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.

JEL Classification

D92 E22

Citation

Gian Maria Tomat (2008). Modeling the Effects of Financial Constraints on Firm's Investment. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008-9. http://dx.doi.org/10.5018/economics-ejournal.ja.2008-9

Assessment

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