Financial Heterogeneity, Investment, and Firm Interactions
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Summary:
Recent literature has shown that corporate indebtedness affects firm-level investment behavior but not necessarily aggregate business cycles. I argue that interactions among heterogeneous firms play an important role in equilibrium. After a downturn, financially unconstrained firms in financially constrained industries significantly increase capital ex-penditure to substitute depressed investment by their financially constrained competitors. The increase in investment, primarily driven by small and medium firms, leads to substantial gains in future sales. Using a new empirical approach, I further show that equilibrium effects are unambiguously countercyclical because the increase in investment by unconstrained firms does not crowd out investment by financially constrained competitors. The “competitive interaction channel” underscored in this paper may play an important role in mitigating the impact of negative shocks in macroeconomic models with financial heterogeneity.
Series:
Working Paper No. 2023/110
Subject:
Capital spending Commodity markets Competition Expenditure Financial markets Government debt management Production Productivity Public financial management (PFM)
Frequency:
regular
English
Publication Date:
May 26, 2023
ISBN/ISSN:
9798400243882/1018-5941
Stock No:
WPIEA2023110
Format:
Paper
Pages:
41
Please address any questions about this title to publications@imf.org