Financial factors in the investment decisions of firms : theory and evidence
Ganoulis, Ioannis (1990) Financial factors in the investment decisions of firms : theory and evidence. PhD thesis, University of Warwick.
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This thesis examines the effects of informational imperfections in the financial system on
the investment decisions of firms. Its main theme is that such imperfections are relevant for the
dynamic aspects of investment decision making, for they affect the cost of flow of new financing.
Since their source is ultimately the decentralized nature of the system, where some of the creditors
of the firm have not access to the firm' s internal operations, the costs involved are likely to
arise in every type of financial market and in the use of every kind of financial instrument. The
only source of funds not affected by the informational problems is the flow of internal financing,
but this is either constrained or involves rising costs for the insiders. Therefore, there are costs of
adjustment in capital accumulation that are related to the financial arrangements of the system.
A dynamic optimization model is built to examine the combined financial and investment
decisions of a firm operating in an asymmetric information environment. The resulting policies
are compared with those of a firm facing conventional adjustment costs and a strongly efficient
financial system. The importance of internal financing is confirmed. The role and problems of the
equity market as a source of finance is also illuminated. Equity finance is found to differ from
debt in so far as equity claims give the right of access to the internal operations of the firm. A
model with both types of adjustment costs is also examined. When conventional adjustment costs
are dismantling costs (when investment is negative), asymmetries arise between under- and over-leveraged
firms with possible implications for policy. Also, Tobin's Q investment approach is
re-examined in a model with both type of costs. The Q variable is found to contain interesting
information even when capital markets are not strongly efficient.
An empirical model is built after examining the behaviour of firms in output markets when
facing a stochastic demand. The model is tested with panel industry level data from Greece for
the manufacturing sector in 1973-1983. An error correction specification is used. The results
confirm the importance of the impact effect of net profitability. Demand and the associated capacity
utilization are also found to have a significant effect in the short and in the long run. The evidence
is less clear for the user cost of capital and the gross profit margin.
|Item Type:||Thesis or Dissertation (PhD)|
|Subjects:||H Social Sciences > HG Finance|
|Library of Congress Subject Headings (LCSH):||Investments, Business enterprises -- Decision making, Information asymmetry|
|Official Date:||August 1990|
|Institution:||University of Warwick|
|Theses Department:||Department of Economics|
|Sponsors:||Greek State Scholarship Foundation (IKY) ; University of Warwick. Department of Economics|
|Extent:||, 193 p.|
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