Financial constraints, inventory investment and fixed capital

In a series of empirical studies Fazzari and Petersen (FP) and their associates examined the substitutability between the stock of fixed capital and inventory investment of firms when they encounter short run and/or sporadic financial constraints. They consider the cashflow constraint as the major source of adjustments. In addition, they argue that the cost differential between external and internal finances makes adjustments in capital investments difficult. Hence, inventory investment is expected to bear the brunt of the adjustment. However, a myopic firm may prefer to increase sales and augment short term cashflows when confronted with a financial constraint. Inventory investment may therefore decrease along with a reduction in fixed capital investments. The firm has many more options if the financial constraints persist. A more satisfactory theoretical explanation for the relationship between the financial constraints and investments in inventories and fixed capital is therefore necessary. This study sets up a comprehensive theoretical framework and demonstrates that changes in cost of production and other logistic costs will be the primary channel through which financial constraints affect investment in inventories and fixed capital. Many other important insights into the transmission mechanism have been highlighte

Securitisation, ratings and regulatory practices

Securitisation, as a structured financial instrument, can give rise to excessive risk taking by the originator. It was expected that credit-rating agencies will assist the Special Purpose Vehicles (SPVs) and investors by revealing the risk. However, given that they pursue their own objectives, of increasing business volume and revenue, credit-rating agencies may not pay attention to investor risks though they claim to do so. This study defines regulatory practices against this backdrop. It is obvious that regulatory measures can be directed to the originator, SPV, or the credit-rating agency. We attempt a comparative evaluation and arrive at an efficient design of regulatory mechanisms and derive the implied credit ratings. In particular, we show that an efficient regulatory practice will be to require a deposit, proportional to the amount of receivables being securitised, from the originator.securitisation; credit ratings; regulation; regulatory practices; structured instrument; financial instruments; excessive risk; credit agencies; special purpose vehicles; SPVs; investors; business volume; business revenues; originators; regulatory mechanisms; receivables; globalisation; trade; global markets; global economy; policy analysis.