COSTLY EXTERNAL FINANCE AND INVESTMENT EFFICIENCY IN A MARKET EQUILIBRIUM MODEL |
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| Authors: | JÁN ZÁBOJNÍK |
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| Institution: | Zábojník:;Associate Professor, Department of Economics, Queen's University, Kingston, Canada. Zip code: K7L 2Y7. Phone (613) 533-2275, Fax (613) 533-6668, E-mail |
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| Abstract: | 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) |
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