Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/17961
Year of Publication: 
2007
Series/Report no.: 
Economics Discussion Papers No. 2007-38
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
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: 
cc-by-nc Logo
Document Type: 
Working Paper

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