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

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.