Liquidity problems, financing constraints and investment decisions: A theoretical modelling with application to Norway

The issues to be studied are closely related to the literature on the links between real economic activity, such as investment, and the financial sector, which argues that financial market imperfections introduce inefficiencies that can have significant r eal effects on an economy. This project will have two parts, one theoretical and one empirical. The theoretical part has two subparts: The first deals with credit cycles and investment while the second one will analyse financial crises. The empirical par t is an application to the Norwegian economy of the SEBRA database, and intends to test the implications of the first subpart of the theoretical modelling. I will avoid the conventional representative firm modelling where financial structure is irrelevant to the investment decision. The objective of the first theoretical part is to study investment patterns when capital markets are imperfect so that only some firms will be credit constrained, and the level of borrowing is determined by the value of the co llateral. The equilibrium level of borrowing will depend on the strategic interaction between monetary authorities, investors and entrepreneurs. It will assume uncertainty and lack of common knowledge on the price of the collateralised asset. The second t heoretical part will deal with alternative endogenous solutions to coordination failures that can arise during financial crises and attain a Pareto improvement. I will finally test the role that financial factors play in investment's decisions in firms/in dustries in Norway. I will study the effect of cash-flows, equity financing, and bank loans on these firms' investment decisions. I will control for the fact that contractions or expansions in the size of bank lending by firms may be affected by the firms ' balance sheet liquidity position. I will also control for periods in which there has been monetary tightening and when firms experience financial distress.