Abstract
Abstract An important question in the literature on corporate finance in the recent years has been whether the dependence on outside finance can force firms to undertake inefficient amounts of investment. Little work has been done, however, on the impact of outside finance on the quality of investment. The present chapter studies this issue in the context of a question which has attracted considerable attention in the financial press and in the economic policy debate: can the dependence on outside finance lead a firm to undertake inefficient myopic investment? To do this, the chapter studies a dynamic model of financial contracting that allows one to characterize the choice of a firm’ s investment horizon.
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