The effects of future financing constraints on capital accumulation: Some new results on the constrained investment problem

Enrico Saltari, University of Rome La Sapienza. Italy
Giuseppe Travaglini, University of Urbino

Abstract

In this paper, we study the effects of future constraints on current investment decisions. Unlike the standard literature on this optimizing problem, we present a model in which firms are neither always constrained nor always unconstrained. We are concerned with those cases where a firm is free from constraints at the current time but expects to face an upper bound at some later date. Using the ‘no arbitrage principle’ in the constrained scenario, we show how to explicitly calculate the optimal investment path switching between regimes. The analytical result shows that the effects of future financing constraints are included in the market value of the firm, and thus are captured by marginal q.