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BPEA | 1988 No. 1

Financing Constraints and Corporate Investment

Bruce C. Petersen,
BCP
Bruce C. Petersen Washington University in St. Lou is
R. Glenn Hubbard, and
R. Glenn Hubbard Dean and Russell L. Carson Professor of Finance and Economics - Columbia Business School
Steven M. Fazzari
SMF
Steven M. Fazzari Washington University in St. Louis
discussants: James M. Poterba
JMP
James M. Poterba Massachusetts Institute Technology

1988, No. 1


EMPIRICAL models of business investment rely generally on the assumption
of a “representative firm” that responds to prices set in centralized
securities markets. Indeed, if all firms have equal access to capital
markets, firms’ responses to changes in the cost of capital or tax-based
investment incentives differ only because of differences in investment
demand. A firm’s financial structure is irrelevant to investment because
external funds provide a perfect substitute for internal capital. In general,
with perfect capital markets, a firm’s investment decisions are independent
of its financial condition.