Costly External Finance and Investment Efficiency in a Market Equilibrium Model

The corporate finance literature suggests that a financially constrained firm invests less than an identical unconstrained firm. This does not imply that financial frictions cause firms to invest less than in a frictionless economy. When firms compete for investment funds, an increase in financial frictions can lead individual firms to increase their investment levels. A greater than the frictionless level of investment is likely in low productivity firms, in cash-rich firms, and in firms with cheap external capital. Government programs that make capital cheaper for small firms may lead to lower levels of investment for all firms and decrease efficiency.


Issue Date:
2008-03
Publication Type:
Working or Discussion Paper
Record Identifier:
https://ageconsearch.umn.edu/record/273636
Language:
English
Total Pages:
34
JEL Codes:
O16; E22; E44; G20
Series Statement:
Working Paper No. 1160




 Record created 2018-06-13, last modified 2018-06-14

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