Financial Market Imperfections and Investment: an Overview

The paper examines the interpretation of firms' investment-cash flow sensitivity as an artifact of financial market imperfection. Two alternative explanations of the financial constraints are compared. One is based on informational problems (asymmetric information). The other focuses on limited commitment between firms and financial intermediates. Empirical evidence of investment-cash flow sensitivity is discussed as well as some of the macroeconomic implications of financial market imperfections.