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The Effect of External Finance on the Equilibrium Allocation of Capital
Heitor Almeida University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER) Daniel Wolfenzon Columbia Business School; National Bureau of Economic Research (NBER) Journal of Financial Economics, Forthcoming Abstract: We develop an equilibrium model to understand how the efficiency of capital allocation depends on outside investor protection and the external financing needs of firms. We show that when capital allocation is constrained by poor investor protection, an increase in firms' external financing needs may improve allocative efficiency by fostering the reallocation of capital from low to high productivity projects. We also find novel empirical support for this prediction.
Keywords: capital reallocation, financial development, investor protection, external finance JEL Classifications: G15, G31, D92 Accepted Paper SeriesDate posted: September 01, 2004 ; Last revised: April 23, 2008Suggested CitationContact Information
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