Costly External Finance And Investment Efficiency In A Market Equilibrium Model

Jan Zabojnik

No 1160, Working Paper from Economics Department, Queen's University

Abstract: The corporate finance literature suggests that a financially constrained firm invests less than an identical unconstrained firm. This does not imply that financial frictions cause firms to invest less than they would in a frictionless economy. When firms compete for investment funds, an increase in financial frictions can lead individual firms to increase their investment levels. A greater than the frictionless level of investment is likely in low productivity firms, in cash-rich firms, and in firms with cheap external capital. Government programs that make capital cheaper for small firms may lead to lower levels of investment for all firms and decrease efficiency.

Keywords: Financial Frictions; Investment distortions (search for similar items in EconPapers)
JEL-codes: E22 E44 G20 O16 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-03
New Economics Papers: this item is included in nep-bec and nep-mac
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1160.pdf First version 2008 (application/pdf)

Related works:
Journal Article: COSTLY EXTERNAL FINANCE AND INVESTMENT EFFICIENCY IN A MARKET EQUILIBRIUM MODEL (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1160

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