Financial Market Constraints and Private Investment in a Developing Country
IMF Working Papers, December 1, 1990
Source details
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- Financial Market Constraints and Private Investment in a Developing Country
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Bibliographic details
- Authors: Omotunde E. G. Johnson
- Published: December 1, 1990
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451939163.001
Summary
- Firms in developing countries that seek outside financing for investment must often choose their debt-equity combinations in the face of financial market constraints on debt service, on outside equity financing, and on internal finance (endowments).
- Inefficiencies in the allocation of available finance and in the equity-debt choices that can ensue can be prevented by appropriate policy measures to:
- improve information on profitable investment opportunities and about firms;
- directly strengthen financial intermediation; and
- support appropriate credit guarantee schemes.
Key findings
- Financial market constraints affect firms’ choice of debt-equity combinations when seeking outside financing for investment.
- Three specific constraint types are emphasized:
- constraints on debt service;
- constraints on outside equity financing; and
- constraints on internal finance (endowments).
- These constraints can generate inefficiencies in the allocation of available finance and in firms’ equity-debt choices.
Policy recommendations
- Improve information on profitable investment opportunities and about firms to reduce information frictions.
- Directly strengthen financial intermediation to expand access to appropriate financing.
- Support appropriate credit guarantee schemes to mitigate constraint-induced inefficiencies.