Fixed investment/fundamental sensitivities under financial constraints

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While most models with financial market imperfections predict investment by financially constrained firms to be more sensitive to financial variables, contracting models argue that investment by such firms should be more sensitive to fundamental determinants of investment because fundamentals capture both investment opportunities and changes in the financial position. By first grouping U.S. manufacturing firms as either financially constrained or unconstrained, this paper examines systematic differences in investment/fundamental sensitivities. The findings show that, as expected of contracting models, investment by financially constrained firms is more responsive to fundamentals. These fundamentals are captured by two prominent empirical measures: profitability shocks and mandated investment rate.

Original languageEnglish (US)
Pages (from-to)25-59
Number of pages35
JournalJournal of Economics and Business
StatePublished - Sep 2014

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Economics and Econometrics


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