Firm investment in imperfect capital markets: A structural estimation

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Review of Economic Dynamics
To cite or link this document: Pratap, Sangeeta Rendón, Silvio
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa 1996-09-01
dc.identifier.citation Review of Economic Dynamics
dc.description.abstract We set up a dynamic model of firm investment in which liquidity constraints enter explicity into the firm's maximization problem. The optimal policy rules are incorporated into a maximum likelihood procedure which estimates the structural parameters of the model. Investment is positively related to the firm's internal financial position when the firm is relatively poor. This relationship disappears for wealthy firms, which can reach their desired level of investment. Borrowing is an increasing function of financial position for poor firms. This relationship is reversed as a firm's financial position improves, and large firms hold little debt. Liquidity constrained firms may be unused credits lines and the capacity to invest further if they desire. However the fear that liquidity constraints will become binding in the future induces them to invest only when internal resources increase. We estimate the structural parameters of the model and use them to quantify the importance of liquidity constraints on firms' investment. We find that liquidity constraints matter significantly for the investment decisions of firms. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is almost 35% higher over a period of 20 years. Transitory shocks to internal funds have a sustained effect on the capital stock. This effect lasts for several periods and is more persistent for small firms than for large firms. A 10% negative shock to firm fundamentals reduces the capital stock of firms which face liquidity constraints by almost 8% over a period as opposed to only 3.5% for firms which do not face these constraints.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 274
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.title Firm investment in imperfect capital markets: A structural estimation
dc.title.alternative 6, 3, (2003), pp. 513-545
dc.type info:eu-repo/semantics/workingPaper 2014-06-03T07:13:55Z
dc.subject.keyword Microeconomics
dc.subject.keyword investment
dc.subject.keyword liquidity constraints
dc.subject.keyword tobin's q
dc.subject.keyword estimation of dynamic structural models
dc.subject.keyword financial accelerator
dc.rights.accessRights info:eu-repo/semantics/openAccess

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