Capital market imperfections and investment : evidence from firm-level panel data
Recent work in macroeconomics argues that imperfections in capital markets may magnify business cycle fluctuations by propagating relatively modest shocks. This thesis investigates evidence for such a mechanism (also known as the "financial accelerator") by analysing two empirical models of investment in physical capital that test for the importance of capital market imperfections on firms' investment decisions. These models are, respectively, an error correction specification augmented with an additional cash flow term, and an Euler equation model explicitly derived from dynamic optimisation in the presence of symmetric, quadratic costs of adjustment. Chapters 4 and 5 use a large panel of individual Italian manufacturing firms to investigate the impact of capital market imperfections on investment expenditures. Regression results from a system Generalised Method of Moments (GMM) estimator appear to be consistent with the hypothesis that firms that are in a strong informational or liquidity position (large firms, group members, RandD performers) are less likely to face binding financing constraints than firms in a weak informational or liquidity position (small firms, independent firms, non-RandD performers). Investment regressions in Chapter 6, based on consolidated accounting data for three samples of UK, US and Italian companies, show that the sensitivity of investment spending to financial variables is greater in the UK and the US than in Italy. This finding is consistent with the suggestion that outsider control financial systems perform less well in channelling investment funds to firms with profitable investment opportunities than do insider control financial systems. Finally, the empirical analysis in Chapter 7, based on two samples of UK and US firms, provides some preliminary evidence that a less concentrated ownership structure and a high level of institutional ownership may increase the sensitivity of investment to the availability of low-cost internal funds.