Dynamic Financial Constraints: Which Frictions Matter for Corporate Policies?

Roberto Steri, Lukas Schmid and Boris Nikolov
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Roberto Steri: University of Lausanne - Swiss Finance Institute
Lukas Schmid: Duke University
Boris Nikolov: University of Lausanne and Swiss Finance Institute

No 630, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We build, solve, and estimate a range of dynamic models of corporate investment and financing. We focus on limited enforcement, moral hazard, and tradeoff models. All models share a common technology structure, but differ in the friction generating financial constraints. Using panel data on Compustat firms for the period 1980-2015 and a more recent dataset on private firms from Orbis, we determine which features of the observed data allow to distinguish among the models, and we assess which model performs best at rationalizing observed corporate investment and financing policies across various samples. Our tests, based on empirical policy function benchmarks, favor limited commitment models for larger compustat firms, and moral hazard models for private firms.

Date: 2017
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:630

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