Financing Constraints and Corporate Investment

Posted: 17 Nov 2009

See all articles by Steven M. Fazzari

Steven M. Fazzari

Washington University in St. Louis

Glenn Hubbard

affiliation not provided to SSRN

Bruce C. Petersen

Washington University in St. Louis - Department of Economics

Alan S. Blinder

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 1988

Abstract

Discusses the connection between conventional models of business investment and the literature on the imperfections in capital markets and the differences in individual firms' abilities to access these markets. Financing methods considered in this analysis include short-term bank debt, long-term bank debt, other long-term debt, and retained earnings. The financing methods used by manufacturing firms between 1970 and 1984 are summarized in the aggregate. The cost of internal financing is often less than external financing because of transaction costs, tax advantages, agency problems, and asymmetric information. This cost premium for external financing is integrated into an existing model of firm financial and investment decisions that has been developed in previous literature in order to create a financing hierarchy model. Data used in the empirical analysis were collected from 422 manufacturing firms. These firms are divided into three classes based on their dividend to income ratio. Results show that firms that retain most of their income have a greater sensitivity of investment to cash flow and liquidity. Firms that were young and had low dividends were most affected. The differences across firms are consistent with financial constraints arising from capital market imperfections. The impact that economic fluctuations and tax policy have on investment are also considered. (SRD)

Keywords: Capital investment, Tax policies, Investment policies, Financial markets, Market constraints, Debt financing, Earnings, Manufacturing industries, Financial constraints, Access to capital, Firm financing

Suggested Citation

Fazzari, Steven M and Hubbard, Glenn and Petersen, Bruce Clayton and Blinder, Alan S. and Poterba, James M., Financing Constraints and Corporate Investment (1988). Brookings Papers on Economic Activity, Vol. 1988, Issue 1, p. 141-206 1988. Available at SSRN: https://ssrn.com/abstract=1505267

Steven M Fazzari (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5693 (Phone)
314-935-4156 (Fax)

Glenn Hubbard

affiliation not provided to SSRN

No Address Available

Bruce Clayton Petersen

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5643 (Phone)

Alan S. Blinder

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James M. Poterba

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)

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