Neoclassical vs Evolutionary Theories of Financial Constraints: Critique and Prospectus

Alex Coad ()

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Abstract: Complicated neoclassical models predict that if investment is sensitive to current financial performance, this is a sign that something is "wrong" and is to be regarded as a problem for policy. Evolutionary theory, on the other hand, refers to the principle of "growth of the fitter" to explain investment-cash flow sensitivities as the workings of a healthy economy. In particular, I attack the neoclassical assumption of managers maximizing shareholder-value. Such an assumption is not a helpful starting point for empirical studies into firm growth. one caricature of neoclassical theory could be "Assume firms are perfectly efficient. Why aren't they getting enoug funding ?", whereas evolutionary theory considers that firms are forever struggling to grow. This essay highlights how policy guidelines can be framed by the initial modelling assumptions, even though these latter are often chosen with analytical tractability in mind rather than realism.

Keywords: Financial constraints; firm growth; evolutionary theory; neoclassical theory; investment; Contraintes financières; croissance des firmes; théorie évolutionniste; théorie néoclassique; investissement (search for similar items in EconPapers)
Date: 2007-02
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00144415
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Citations: View citations in EconPapers (3)

Published in 2007

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Related works:
Journal Article: Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus (2010)
Working Paper: Neoclassical vs Evolutionary Theories of Financial Constraints: Critique and Prospectus (2007)
Working Paper: Neoclassical vs evolutionary theories of financial constraints: critique and prospectus (2007)
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