Agency Costs, Credit Constraints and Corporate Investment

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 affected by both adjustment and agency costs, but not by credit constraints. Moreover, it is also shown that financial decisions are affected by agency costs. Finally, there is evidence of credit constraints prior to financial deregulation, but not specifically for small or independent firms.