Investments, financial structure and imperfect financial markets: An intertemporal discrete-time framework

Abstract

This paper deals with the problem of simultaneity between the firm's investments and financial structure in the context of dynamic optimization where the process of information spreading that associates the profitability of the firm to its share price only takes part gradually, due to market imperfections and diverging incentives between shareholders and managers. In particular, the latter are assumed to hold the control of the firm and decide upon the allocation of its cash-flow. This creates a link between cash-flow and rate of discount of profits, generating a ‘financial channel of transmission’ of the real shocks.