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Investment and Debt Constraints: Evidence from Dutch Panel Data

In: Market Behaviour and Macroeconomic Modelling

Author

Listed:
  • Hans Ees
  • Harry Garretsen
  • Leo Haan
  • Elmer Sterken

Abstract

It is generally accepted that real markets are sometimes affected by imperfections and their consequences. In contrast, the functioning of financial markets is mostly assumed to be perfect and efficient. Modigliani and Miller (1958, hereafter MM) show that in the latter case the capital structure of the firm is irrelevant for the user cost of capital and does neither affect investment nor the value of the firm. Since the publication of their seminal paper a large number of studies has pointed out that the empirical relevance of the MM-proposition is small. Financial markets suffer from several (institutional) market imperfections. In the first twenty years after the MM-publication, papers showed that distortionary taxes, transaction, bankruptcy and agency costs cause the financial structure to affect investment decisions. In recent studies the focus is directed towards information asymmetries. Agents have different sets of information. Firms know more about the quality of their investment project than, for instance, a bank. It can be shown that in such a case external funds (for instance bank credit) are more expensive than internal funds, because problems like adverse selection and moral hazard may occur. This might explain the empirical phenomenon that firms preferably use internal funds to finance Investment.1

Suggested Citation

  • Hans Ees & Harry Garretsen & Leo Haan & Elmer Sterken, 1998. "Investment and Debt Constraints: Evidence from Dutch Panel Data," Palgrave Macmillan Books, in: Steven Brakman & Hans Ees & Simon K. Kuipers (ed.), Market Behaviour and Macroeconomic Modelling, chapter 6, pages 159-179, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-26732-3_6
    DOI: 10.1007/978-1-349-26732-3_6
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    Citations

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    Cited by:

    1. Lünnemann, Patrick & Mathä, Thomas Y., 2001. "Monetary transmission: empirical evidence from Luxembourg firm level data," Working Paper Series 111, European Central Bank.
    2. Bruinshoofd Allard & Kool Clemens, 2002. "The Determinants of Corporate Liquidity in the Netherlands," Research Memorandum 014, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    3. W. Allard Bruinshoofd & Clemens J. M. Kool, 2004. "Dutch Corporate Liquidity Management: New Evidence on Aggregation," Journal of Applied Economics, Taylor & Francis Journals, vol. 7(2), pages 195-230, November.
    4. repec:onb:oenbwp:y::i:90:b:1 is not listed on IDEAS
    5. Sylvia Kaufmann & Maria Teresa Valderrama, 2004. "Modeling Credit Aggregates," Working Papers 90, Oesterreichische Nationalbank (Austrian Central Bank).
    6. Hung, Jessica & Chang, Vincent Y. L., 2018. "The analysis of capital structure for propertyliability insurers: A quantile regression approach," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(4), pages 829-850, August.
    7. de Haan, Leo & Hinloopen, Jeroen, 2003. "Preference hierarchies for internal finance, bank loans, bond, and share issues: evidence for Dutch firms," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 661-681, December.

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