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COSTLY EXTERNAL FINANCE AND INVESTMENT EFFICIENCY IN A MARKET EQUILIBRIUM MODEL
Author(s) -
ZÁBOJNÍK JÁN
Publication year - 2009
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2008.00167.x
Subject(s) - investment (military) , economics , productivity , monetary economics , capital market imperfections , finance , capital (architecture) , internal financing , corporate finance , capital market , macroeconomics , information asymmetry , history , archaeology , politics , political science , law
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 (JEL O16, E22, E44, G20)