Économie et Statistique n° 341-342 - 2001Investment and Financing of Firms
The Effect of Financial Conditions on Investment Decisions
The last ten years have seen renewed interest in studying the links between corporate investment and financing decisions. Although it is old news that a company's financing conditions influence its actual behaviour, this fact has come back into favour with the development of new microeconomics and especially the appearance of the theory of information problems. Theoretical and empirical studies have looked in more detail at the interactions between financial conditions and the actual behaviour of economic players, whether in terms of consumption, investment, employment, price setting or stocks. Some typical microeconomic models presented in this paper give a good idea of the way in which information problems can interfere with the behaviour of companies. These models study the allocative consequences of information asymmetry on the financial markets. They hence provide testable predictions. The econometric models of investment derived from these theoretical models are then reviewed with tests subsequently put forward to check their validity. The trickiest part of these approaches is isolating the effects of the financial variables caused by the existence of a financing premium from the effects due to changes in the company's investment opportunities, effects that these opportunities can also sometimes represent. Only models using individual data are studied, since the extent of access to the capital market and the corporate assets situation are key variables in financial imperfection models. This information can only be provided at individual level.