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| Title: | | Modeling the Effects of Financial Constraints on Firm´s Investment  |
| Authors: | | Tomat, Gian Maria |
| Issue Date: | | 2007 |
| Series/Report no.: | | Economics Discussion Papers / Institut für Weltwirtschaft 2007-38 |
| 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. |
| Subjects: | | firm´s investment financial constraints Tobin´s marginal q uncertainty |
| JEL: | | E22 D92 |
| Creative Commons License: | |  |
| Document Type: | | Working Paper |
| Appears in Collections: | | Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers
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