Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: The importance of credit market imperfections for investment behavior is analyzed using Swedish firm level data. Adjustment and agency costs are included in the neoclassical theory of optimal financial and investment decisions for firms. In order to model the possible occurrence of agency costs of debt, and credit constraints, the behavior of banks is reviewed in the light of the theory of imperfect information. The econometric results indicate that investments are a¤ected by both adjustment and agency costs, but not by credit constraints. Moreover, it is also shown that financial decisions are a¤ected by agency costs. Finally, there is evidence of credit constraints prior to financial deregulation, but not specifically for small or independent firms.

Keywords: Credit constraints; Debt externalities; Expected marginal tax rate; Investment; Monitoring costs

JEL-codes: D92; G31

47 pages, April 1, 1999

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