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Costly External Finance And Investment Efficiency In A Market Equilibrium Model

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  • Jan Zabojnik

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 they would 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.

Suggested Citation

  • Jan Zabojnik, 2008. "Costly External Finance And Investment Efficiency In A Market Equilibrium Model," Working Paper 1160, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1160
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Frictions; Investment distortions;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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