Financial Structure and Investment Decisions: A Survey of Theoretical and Empirical Work (download PDF 907 Kb)

Enrico Saltari, December 2001.

Abstract
After the Modigliani-Miller theorem, traditional economic theory assumed that investment decisions were independent of financial structure. Over the last fifteen years, however, a growing number of theoretical and empirical studies have shown that financial structure exerts an important influence on investment decisions. The aim of this paper is to review these studies critically, pointing out the gap between theoretical models and empirical testing, and identifying directions for future research. In particular it is necessary to achieve better integration between theoretical and empirical models. It is argued that theoretical models fail to include financial variables explicitly and directly as determinants of investment, while in empirical models financial
variables are part of the investment equation. At the same time the recent empirical literature suggests that the effects of financial variables may vary in the presence of specific constraints. This implies that we still do not know exactly how financial variables affect investment decisions.

This paper has been prepared under the fifth EU Framework Programme,
Key Action: Improving the Socioeconomic Knowledge Base. [Contract No HPSE-CT-1999-00039]