IMF Working Papers

Financial Heterogeneity, Investment, and Firm Interactions

By Yang Liu

May 26, 2023

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Format: Chicago

Yang Liu. Financial Heterogeneity, Investment, and Firm Interactions, (USA: International Monetary Fund, 2023) accessed November 8, 2024

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.

Subject: Capital spending, Commodity markets, Competition, Expenditure, Financial markets, Government debt management, Production, Productivity, Public financial management (PFM)

Keywords: Capital spending, Commodity markets, Competition, Equilibrium effect, Equilibrium effects, Financial constraints, Firm interaction, Government debt management, Imperfect competition, Interaction channel, Investment, Investment behavior, North America, Product similarity, Productivity

Publication Details

  • Pages:

    41

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/110

  • Stock No:

    WPIEA2023110

  • ISBN:

    9798400243882

  • ISSN:

    1018-5941

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