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Corporate investment in Europe: The role of finance

Philipp-Bastian Brutscher, Jonas Heipertz, Christopher Hols, (2018), «Corporate investment in Europe: The role of finance», VoxEU, 23 Απριλίου

The question of how firms finance their business and investment activity is long-standing in the academic literature as well as in policy circles. Indeed, the availability of sufficient sources of funding is at the heart of the dynamics and functioning of market economies. The stabilising role of monetary policy relies on the transmission of lower costs of external funding into higher demand through increased consumption and/or investment activity.

The leading theories on the optimal financing mix – Modigliani and Miller’s (1958)capital-structure irrelevance, the trade-off theory (Kraus and Litzenberger 1973), agency theories (Jensen and Meckling 1976) and the pecking-order theory (Myers and Majluf 1984) – and the overwhelming majority of empirical analyses attempt to explain the proportions of debt and equity instruments in a firm’s total liabilities (Myers 2001). To the best of our knowledge, however, almost no theoretical or empirical work exists that analyses preferences of firms over specific characteristics of debt financing, such as collateral requirements, maturity or fixed versus floating interest rates and their pass-through to real investment decisions, and how these translate into real activity.

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