Capital market imperfections : informational asymmetries, financing constraints and New Zealand corporate investment behaviour

Abstract

Standard economic theory holds that the availability of internal sources of finance to the firm will be irrelevant to the determination of its investment expenditure. Under the assumption of informational asymmetries between the managers of the firm and agents in financial markets, it is possible to derive the theoretical result that a firm's investment expenditure will be constrained by the availability of internal finance. This thesis tests for the existence of such an internal-finance constraint, using data collected for the investment expenditures of New Zealand firms. The results suggest that the availability of internal finance does indeed appear to constrain investment expenditures and that the pattern of this internal-finance constraint is consistent with its being induced by the informational asymmetry postulated.