Fixed investment/fundamental sensitivities under financial constraints

Nihal Bayraktar

Journal of Economics and Business, 2014, vol. 75, issue C, 25-59

Abstract: While most models with financial market imperfections predict investment by financially constrained firms to be more sensitive to financial variables, contracting models argue that investment by such firms should be more sensitive to fundamental determinants of investment because fundamentals capture both investment opportunities and changes in the financial position. By first grouping U.S. manufacturing firms as either financially constrained or unconstrained, this paper examines systematic differences in investment/fundamental sensitivities. The findings show that, as expected of contracting models, investment by financially constrained firms is more responsive to fundamentals. These fundamentals are captured by two prominent empirical measures: profitability shocks and mandated investment rate.

Keywords: Financial market imperfections; Contracting models; Fixed investment; Fundamentals; Profitability shocks (search for similar items in EconPapers)
JEL-codes: D2 E22 G1 G3 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:75:y:2014:i:c:p:25-59

DOI: 10.1016/j.jeconbus.2014.05.001

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