Financial Heterogeneity, Investment, and Firm Interactions

Yang Liu

No 2023/110, IMF Working Papers from International Monetary Fund

Abstract: Recent literature has shown that corporate indebtedness affects firm-level investment behavior but not necessarily aggregate business cycles. I argue that interactions among heterogeneous firms play an important role in equilibrium. After a downturn, financially unconstrained firms in financially constrained industries significantly increase capital ex-penditure to substitute depressed investment by their financially constrained competitors. The increase in investment, primarily driven by small and medium firms, leads to substantial gains in future sales. Using a new empirical approach, I further show that equilibrium effects are unambiguously countercyclical because the increase in investment by unconstrained firms does not crowd out investment by financially constrained competitors. The “competitive interaction channel” underscored in this paper may play an important role in mitigating the impact of negative shocks in macroeconomic models with financial heterogeneity.

Keywords: Financial constraints; investment; equilibrium effects; imperfect competition; firm interaction; investment behavior; equilibrium effect; interaction channel; product similarity; Government debt management; Productivity; Capital spending; Commodity markets; Competition; North America (search for similar items in EconPapers)
Pages: 41
Date: 2023-05-26
New Economics Papers: this item is included in nep-cfn and nep-fdg
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