Firms’ Investment in the Presence of Labor and Financial Market Imperfections

Giorgio Calcagnini (), Germana Giombini () and Enrico Saltari ()
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Germana Giombini: Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)

No 901, Working Papers from University of Urbino Carlo Bo, Department of Economics

Abstract: This paper analyses how financial and labor market imperfections jointly influence investment. The contemporaneous presence of imperfections in both markets gives rise to a negative correlation between EPL and investment: firms facing negative shocks see their financial constraints worsen in countries with greater labor market rigidities. Internal funds have an overall positive impact on investment, notwithstanding the presence of labor market rigidities acts as a disincentive to the use internal funds for financing new projects. If capital is sunk and the legal environment favors ex-post profit appropriation by workers, firms use internal funds for ends alternative to fixed investment. Our results support the effort put forward by European institutions to reform both markets.

Keywords: Investment Models; Financing Constraints; Labor Protection Legislation; Panel Data Models (search for similar items in EconPapers)
JEL-codes: E2 G31 J50 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-lab and nep-mac
Date: 2009, Revised 2009
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http://www.econ.uniurb.it/RePEc/urb/wpaper/WP_09_01.pdf First version, 2008 (application/pdf)

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