Abstract not found

This paper tests traditional capital structure models against the alternative of a pecking order model of corporate financing. The basic pecking order model, which predicts external debt financing driven by the internal financial deficit, has much greater timeseries explanatory power than a static tradeoff model, which predicts that each firm adjusts gradually toward an optimal debt ratio. We show that our tests have the power to reject the pecking order against alternative tradeoff hypotheses. The statistical power of some usual tests of the tradeoff model is virtually nil. � 1999 Elsevier Science S.A. All rights reserved. JEL classification: G32

This paper provides a micro-level evidence that financial development impacts growth by reducing financing constraints that would otherwise restrict efficient firm investment. I estimate a structural model based on the Euler equation for investment using firm-level data from 40 countries. I find a strong negative relationship between the extent of financial market development, and the sensitivity of investment to availability of internal funds (a proxy for financing constraints). I also consider size effect, business cycles and legal environment as plausible alternative explanations and find the results to be robust in all cases.

There is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival. In this paper we model a multi-period borrowing/lending relationship with asymmetric information. We show that borrowing constraints emerge as a feature of the optimal long-term lending contract, and that such constraints relax as the value of the borrower’s claim to future cash-flows increases. We also show that the optimal contract has interesting implications for firm dynamics. In agreement with the empirical evidence, as age and size increase, mean and variance of growth decrease, firm survival increases, and the sensitivity of

A recent paper in this Journal by Kaplan and Zingales reexamines a subset of �rms from work of Fazzari, Hubbard, and Petersen and criticizes the usefulness of investment-cash �ow sensitivities for detecting �nancing constraints. We show that the Kaplan and Zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique. Moreover, we describe why their empirical classi�cation system is �awed in identifying both whether �rms are constrained and the relative degree of constraints across �rm groups. We conclude that their results do not support their conclusions about the usefulness of investment-cash �ow sensitivities. In a recent paper in this Journal Kaplan and Zingales {1997, hereinafter KZ} argue that investment-cash �ow sensitivities do not provide useful evidence about the presence of �nancing constraints. Because KZ use a subset of the same �rms and the same regressions as Fazzari, Hubbard, and Petersen {1988, hereinafter FHP} and claim {page 176} that FHP ‘‘can legitimately

This essay surveys the body of research that asks how the efficiency of corporate investment is influenced by problems of asymmetric information and agency. I organize the material around two basic questions. First, does the external capital market channel the right amount of money to each firm? That is, does the market get across-firm allocations right, so that the marginal return to investment in firm i is the same as the marginal return to investment in firm j? Second, do internal capital markets channel the right amount of money to individual projects within firms? That is, does the internal capital budgeting process get withinfirm allocations right, so that the marginal return to investment in firm i’s division A is the same as the marginal return to investment in firm i’s division B? In addition to discussing the theoretical and empirical work that bears most directly on these questions, the essay also briefly sketches some of the implications of this work for broader issues in both macroeconomics and the theory of the firm.

We review the changes in modelling strategy and econometric methodology when estimating a firm-level investment equation on panel data during the past twenty years, in order to assess which of these changes result from new estimation methods and changes in the practice of panel data econometrics, and which are "real" and due to the evolution of the economy. Thus our paper consists of a series of comparisons: a simple accelerator-profit specification versus one with error correction, traditional between- and within-firm estimation versus GMM estimation, the investment behavior of French firms versus that of U.S. firms, and investment behavior today versus ten to twenty years ago. Although the econometric advances have perhaps not been as successful as we had hoped, we do find some real change in firm behavior and some improvement in equation specification and interpretation during the past twenty years. 1

We use a production-based asset pricing model to investigate whether financial market imperfections are quantitatively important for pricing the cross-section of returns. Specifically, we use GMM to explore the stochastic Euler equation restrictions imposed on asset returns by optimal investment behavior. Our methodology allows us to identify the impact of financial frictions on the stochastic discount factor with cyclical variations in cost of external funds. We find evidence that financing frictions provide an important common factor for the cross section of stock returns. In addition, we find that the shadow price of external funds exhibits strong procyclical variation, so that financial frictions are more important when economic conditions are relatively good. These findings seem consistent with models emphasizing the importance of agency conflicts between insiders and outsiders.

This paper combines the agency theory of the firm with risk diversification incentives for insiders. Principal-agent problems between insiders and outsiders force insiders to retain a larger share in their firm than they would under a perfect risk diversification strategy. We predict that this higher share of insider ownership and the resulting exposure of insiders to higher idiosyncratic risk will result in underinvestment and higher cost of capital. Using firm-level data from 38 countries, the authors provide evidence in support of their theoretical model, showing that the premium for bearing idiosyncratic risk varies between zero and six percent and decreases in the level of outside investor protection. The results of the paper imply that policies aimed at strengthening investor protection laws and their enforcement will improve capital allocation and result in higher growth.

We survey recent microeconometric research on investment and employment that has used panel data on individual firms or plants. We focus on model specification and econometric estimation issues, but we also review some of the main empirical findings. We discuss advantages and limitations of microeconomic data in this context. We briefly review the neoclassical theory of the demand for capital and labour, on which most of the econometric models of investment and employment that we consider are based. We pay particular attention to dynamic factor demand models, based on the assumption that there are costs of adjustment, which have played a prominent role especially in the microeconometric literature on investment. With adjustment costs, current choices depend on expectations of future conditions. We discuss the challenges that this raises for econometric model specification, and some of the solutions that have been adopted. We also discuss estimation issues that