Market Imperfections in Company Investment Decisions

We explore the role of capital market imperfections in the variability of aggregate investment, employing a UK population-based panel data for the period of 1991-2002. Accelerator model and Euler equation were estimated to assess the heterogeneous impacts of disturbance of market frictions on firm investment decisions in a state of endogenously transiting across different financial regimes. We explore these issues by classifying companies based on access to public equity, industry group, firm size, attained age and retention behaviour. This study demonstrates that investment is most closely correlated with cash flow for certain groups that are expected to face relatively severe asymmetries of information. These companies tended to be young and/or smaller, to have no stock traded on the market and high retention ratios, or to operate in the industries of low asset marketability or of high business risk. This study provides links between aggregate economic fluctuations and problems in financial markets