Modeling the Effects of Financial Constraints on Firm's Investment

Gian Maria Tomat

Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), 2008, vol. 2, No 2008-9, 26 pages

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: 2008
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http://dx.doi.org/10.5018/economics-ejournal.ja.2008-9
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifweej:7126

DOI: 10.5018/economics-ejournal.ja.2008-9

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