Modeling the Effects of Financial Constraints on Firm´s Investment

Gian Maria Tomat

No 2007-38, Economics Discussion Papers from Kiel Institute for the World Economy

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.

Keywords: firm´s investment; financial constraints; Tobin´s marginal q; uncertainty (search for similar items in EconPapers)
JEL-codes: D92 E22 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-bec and nep-mac
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https://www.econstor.eu/bitstream/10419/17961/1/dp2007-38.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:6165

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