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Financial Constraints and Investment decisions
Scottish Journal of Political Economy (2001)
  • Giuseppe Travaglini
  • Enrico Saltari

In what follows we show that liquidity constraints can affect a firm's investment even when the constraints are not currently effective. This happens when, at any given time, the firm believes that internal finance is likely to become a constraint in the future. In these circumstances, the value of the firm becomes a non-monotonic functional form of the fundamental. Thus, in a dynamic setting, the potential barrier to internal liquidity expansion exerts a global effect on the firm's investment policy, lowering its desired investment profile.

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Giuseppe Travaglini and Enrico Saltari. "Financial Constraints and Investment decisions" Scottish Journal of Political Economy Vol. 48 Iss. 3 (2001)
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