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Title:Modeling the Effects of Financial Constraints on Firm's Investment PDF Logo
Authors:Tomat, Gian Maria
Issue Date:2008
Citation:[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [Volume:] 2 [Issue:] 2008-9 [Pages:] 1-26 [DOI/URN:] doi:10.5018/economics-ejournal.ja.2008-9
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
Persistent Identifier of the first edition:doi:10.5018/economics-ejournal.ja.2008-9
Creative Commons License:http://creativecommons.org/licenses/by-nc/2.0/de/deed.en
Document Type:Article
Appears in Collections:Economics: The Open-Access, Open-Assessment E-Journal - Journal Articles

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