Firm's optimal capital accumulation path with asymmetric informations and debt instead of equity finance

Marco Gallegati

No 79, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: Two Euler equations are obtained from a firm's investment intertemporal dvnamic model where debt finance is the onlv external source of funds and firms face borrowing constraints in the form of a limit to the maximum amount of outstanding debt. As suggested by the hierarchy of finance model they represent the optimal capital accumulation path for firms belonging to different financing regimes. The Euler equations differ for a discount factor function of the nominal interest rate on debt for liquidity constrained firms and of the rate of return on retentions for unconstrained firms. Then, when asymmetric information is a characteristic of the financial markets, liquidity constrained firms will be characterized by a lower optimal capital accumulation path than the unconstrained ones.

Pages: 19
Date: 1996-06
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