Year: 2014
Type: report
Abstract: Financing terms and investment decisions are jointly determined.This interdependence links firms' asset and liability sides and can lead to short-termism in investment.In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed.In response, firms whose first-best investment opportunities are long-term may change their investments towards second-best projects of shorter maturities.This worsens financing terms for firms with shorter maturity projects, inducing them to change their investments as well.In equilibrium, investment is inefficiently short-term.Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.
DOI: 10.3386/w19946
Authors: Konstantin Milbradt, Martin Oehmke
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2800564447