Modeling the Effects of Financial Constraints on Firm´s Investment

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Discussion Papers ; No. 2007-38

Classification and Topics

• Classification: Wirtschaft ; Investment; Capital; Intangible Capital; Capacity
• Subject: firm´s investment ; financial constraints ; Tobin´s marginal q ; uncertainty

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Tomat, Gian Maria
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/17961
• Last update: 10.03.2025, 11:43 AM CET